Like everything else in the world, the M&A landscape was upended in 2020 due to the coronavirus. When COVID-19 began disrupting the economy back in March, deals were delayed or scrapped altogether, creating a months-long lull as companies focused solely on their own operations.
But activity picked up beginning at the end of the second quarter and has accelerated ever since, with some of the most high-profile deals in history happening across distribution in a year unlike any other. As part of our look back at 2020, MDM has compiled five M&A themes that emerged in the industry and also listed some of the biggest deals of the year.
M&A Returns with a Vengeance
After a pause due to COVID-19, deal volume returned in earnest at the end of the second quarter and into the third quarter, with activity accelerating to close the year. Some of the larger consolidators in distribution — both on the financial and strategic side — made plays or announced their intent to step off the sidelines and steer their capital toward prime targets. The move that kicked everything off was WESCO’s $4.5 billion acquisition of Anixter, the roots of which date back to late 2019. The deal survived the pandemic and closed in June. A flurry of deals, though none as sizeable, followed in the ensuing months making 2020 a somewhat decent year for M&A. Look for this trend to continue in 2021.
PE Firms Deploy Dry Powder
Private-equity firms made headlines in the latter half of 2020 for the fat stacks of cash they invested in distribution, especially building materials and construction. Here are a few examples (all of which are linked below). Clayton, Dubilier & Rice bought HD Supply’s White Cap division for $2.9 billion (and also distribution ERP provider Epicor for a staggering $4.7 billion). Clearlake Capital Group L.P. acquired PrimeSource from another PE firm, Platinum Equity. Affiliates of American Securities LLC paid $1.4 billion for Foundation Building Materials Inc. and $850 million for Beacon’s Interior Products Business. And Bain Capital Private Equity bought US LBM Holdings.
Building Materials Sector Blows Up
In addition to the mega-deals mentioned above, consolidation was rampant across the building materials sector, with both strategic and financial deals regularly being announced to close the year. The strategic highlight was HD Supply Holdings Inc.’s return to its roots when The Home Depot bought the building products distributor for $8.7 Billion. In 2007, Home Depot had sold HD Supply to private equity, and HDS went public in 2013, operating on its own for the last seven years but slowly shedding business division until it went back to its core focus — and back to its original owner.
A New Deal-Making Landscape
While due diligence became harder to navigate thanks to social distancing and reduced air travel, companies that saw deals as advantageous to their businesses found a way to get them done over Zoom, Teams or Webex. However, this new dynamic did cut down on “de novo,” or new, transactions where the parties didn’t know one another. “In this current environment, conducting due diligence is harder, and assessing individuals and personalities is harder,” Reed Anderson of Houlihan Lokey told MDM for a July report on M&A. “If you are a strategic buying a smaller player in your space, you can take comfort in generally knowing what that target has been doing, and you have personnel capabilities on your team to make sure that M&A transaction works well post-close.”
Valuation Becomes More Challenging
With lockdowns in place and many companies’ revenues stunted due to COVID-19 restrictions and the general economic slowdown, valuations became increasingly difficult to gauge. Was a company’s struggles — or its successes (think PPE) — due to COVID or something else? “I definitely would not say that a business that experiences challenges right now is going to face a distressed valuation,” Nick Troyer of Baird told MDM. “On the other end of the spectrum, however, I do believe there will be a premium for businesses that outperform through this crisis. When we’ve analyzed valuation multiples over time across distribution sectors, we clearly see the value in downside protection. The stronger performers are also likely to be the first to come back out.”
Here are some of the most important, market-shifting deals of 2020, as reported in MDM throughout the year. (This is just a sampling of acquisition activity presented in ascending chronological order; to read all of our M&A coverage, click here to visit our monthly roundups.)
- WESCO Completes Merger with Anixter International — WESCO International Inc., Pittsburgh, Pennsylvania, announced in June it had completed its merger with Anixter International Inc. The move united two of the largest distributors in the electrical space. Click here to read MDM’s analysis of the deal.
- CD&R to Acquire Epicor from KKR for $4.7 Billion — New York-based private equity firm Clayton, Dubilier & Rice announced it would acquire Epicor Software Corp. from investment firm KKR for $4.7 billion. Epicor is a major player in the distribution ERP space.
- Builders FirstSource to Acquire BMC Stock Holdings for $2.5 Billion — Builders FirstSource Inc., Dallas, Texas, and BMC Stock Holdings Inc., Raleigh, North Carolina, in August announced that they have entered into a definitive merger agreement under which Builders FirstSource and BMC will combine in an all-stock merger transaction valued at $2.5 billion. The deal unites the No. 2 (BLDR) and No. 5 (BMCH) companies on MDM’s 2020 Building & Construction Top Distributors list. Click here to read MDM’s analysis of the deal.
- HD Supply Shifts Gears, Opts to Sell White Cap to CD&R for $2.9B — HD Supply Holdings Inc., Atlanta, announced that it has entered into a definitive agreement to sell its Construction & Industrial – White Cap business to an affiliate of the private equity firm Clayton, Dubilier & Rice for $2.9 billion. Click here to read MDM’s analysis of the deal.
- Lawson Products Acquires Partsmaster — MRO distributor Lawson Products Inc. (Nasdaq: LAWS), Chicago, announced the acquisition of Partsmaster, a Greenville, Texas-based MRO solutions provider, for $35.3 million. Click here to read MDM’s interview with Lawson executives about the deal.
- PrimeSource Being Sold from One PE Firm to Another — Specialty building materials distributor PrimeSource, Irving, Texas, is being sold from one private equity firm to another. Its previous owner, Platinum Equity, announced that it has agreed to sell PrimeSource — its official corporate moniker is PriSo Holding Corp. — to Clearlake Capital Group L.P. The financial terms of the deal were not disclosed.
- Foundation Building Materials to Be Acquired for $1.4 Billion — Specialty building products distributor Foundation Building Materials Inc., Santa Ana, California, has agreed to be acquired by an affiliate of the private equity firm American Securities LLC for $19.25 per share, or $1.4 billion, including outstanding debt. An affiliate of Lone Star Funds, another private equity firm, acquired FBM in 2015 and has maintained majority ownership since the company’s initial public offering in 2017. FBM will become a privately held company.
- Home Depot to Acquire HD Supply Holdings for $8.7 Billion — HD Supply Holdings Inc., Atlanta, announced that it is being acquired by home improvement retailer The Home Depot Inc. for $56 per share, or $8.7 billion. Home Depot sold HD Supply to private equity in 2007, and HDS went public in 2013.
- US LBM to Be Acquired by Bain Capital Private Equity — Building materials distributor US LBM, Buffalo Grove, Illinois, agreed to be acquired by Bain Capital Private Equity, which will own a majority stake in the company. US LBM will continue to operate under the leadership of President and CEO L.T. Gibson and the current management team. The financial terms of the deal were not disclosed.
- Beacon to Divest Interior Products Business — Beacon Roofing Supply Inc., Herndon, Virginia, agreed to sell its interior products business — consisting of 81 branch locations where it distributes a variety of construction products to both residential and commercial contractors — to affiliates of the private equity firm American Securities LLC for $850 million.
Join MDM in February for a Virtual M&A Summit
MDM is hosting a Virtual M&A Summit on Feb. 25, 2021, that will tap into these trends and more. We’ll soon be sending out the full agenda and speaker lineup, but it will be an informative and engaging look at the entire M&A landscape, including considerations for buyers and sellers, advice on performing due diligence in a pandemic and a macro look at which sectors are projected to see the most consolidation in 2021.