Is Ferguson Finally Back in Acquisition Mode?

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Is Ferguson Finally Back in Acquisition Mode?

After pausing M&A activity back in March due to COVID-19, Ferguson says it has some deals in the pipeline, so it’s only a matter of time before the distributor again starts growing through acquisition.
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Ferguson, one of the more acquisitive companies in distribution, paused M&A activity back in March. The COVID-19 crisis brought too much uncertainty not only to the deal environment but also the economic landscape as a whole.

But with business settling into a new normal and fiscal 2020 now complete, the UK-based distributor — which has a huge presence in the U.S. through its Ferguson Enterprises brand — is raring to resume acquisition mode.

“Going forward, we have a number of attractive traditional bolt-on acquisitions in the pipeline, several of which we expect to conclude later this year,” Ferguson’s group CEO, Kevin Murphy, told analysts on Tuesday morning’s earnings call. “But in addition to bolt-ons, we’ll also use acquisitions to grow capabilities that will make our branches and our digital channels more relevant. Many of these opportunities allow us to get closer to the consumer and owner while adding to our own brand product offering.”

Murphy’s acquisition proclamation came after the company reported fiscal 2020 sales of $21.8 billion. That was down 0.9% compared to fiscal year 2019, while profit of $1.3 billion marked a 4.8% decrease from the year-ago period.

But the company said its U.S. division saw revenue growth of 2.7% to $18.9 billion and underlying trading profit growth of 5.2% to $1.6 billion.

As the company looks to fiscal 2021, it is wary of continued softness due to the coronavirus but eager for growth opportunities — especially on this side of the pond.

“It is impossible to predict the future progress of the virus or its economic impact and we expect the current levels of uncertainty to continue for the foreseeable future,” Murphy said in the company’s earnings press release. “However, the fundamental aspects of our business model remain attractive and since the start of the new financial year, Ferguson has generated low single-digit revenue growth in the U.S. in flat markets overall. While we remain cautious on the outlook for the year as a whole, the business is in good shape and well prepared to address any further market-related disruption.”

Behind Ferguson’s M&A Approach

A big part of growth plan revolves around M&A. Before Ferguson paused deal activity in March due to the COVID-19 crisis, it had already invested $351 million in six acquisitions during the fiscal year.

Ferguson Enterprises ranks No. 1 on MDM’s Market Leaders list for the Top 40 Industrial & Construction distributors. Not only is it the largest U.S. distributor of plumbing supplies, PVF, waterworks and fire and fabrication products, but it’s also the third-largest distributor of industrial and HVACR products.

The U.S. division posted $18.9 billion in sales in the fiscal year, up from $18.4 billion, counts 27,000 associates, 1,400 locations, 10 distribution centers and customers in all 50 states, the Caribbean, Puerto Rico and Mexico.

Right before the company’s M&A pause, it pulled off the largest of its fiscal 2020 deals with the acquisition of Columbia Pipe & Supply Co., a distributor in Chicago. The business profile of Columbia Pipe — Murphy described the company as one with a “strong reputation and well-established vendor and customer relationships in this important region” — provides some clues as to the type of target Ferguson might pursue once it begins moving forward with acquisitions.

“As we go through COVID and beyond the investments necessary for foundational technology for what an omnichannel experience looks like, for the tools that are necessary to drive this business, I do think it will create opportunities for us to acquire businesses that have great local relationships, that we can plug together with that technology, with that supply chain, with that breadth and depth of product offering to make them more successful,” Murphy said. “So that’s what I’m most bullish about in terms of bolt-on M&A as we look forward.”

Even Bill Brundage, whose appointment to Ferguson’s group CFO was just announced Tuesday, chimed in on the company’s M&A strategy and the types of assets it was interested in going after.

“From a margin standpoint, the vast majority of those acquisitions that we do have a lower margin, lower trading margin than what we have, and we look to bring those synergies in quickly and get them up to our trading multiple over a couple of years,” he said on the earnings call. “If you think about the traditional bolt-on M&A deals that we do, we go in quickly, we put them on our system, we hook them up to our supply chain, we get to distribution and the fleet synergy, we get sourcing synergies, and then we can take a little bit of back-office costs out as well in those acquisitions. That’s typically how we approach the M&A front.”

Photo courtesy Ferguson

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