M&A is arguably the biggest news driver in MDM’s editorial coverage, and 2023 kept us very busy on that front.
As detailed in my year-end recap Premium article at the end of December, we posted 403 news briefs about M&A items involving industrial, commercial and building supplies distributors, or manufacturers that sell into distribution.
That figure blew the 263 and 258 items we covered in 2022 and 2021 out of the water.
So, I wanted to recruit someone with expertise on distribution M&A activity on to the MDM Podcast to debrief what happened in 2023 and what we can expect in 2024.
My guest in this episode is Kevin Sargent, who is the Managing Director the Industrials team at Brown Gibbons Lang & Company (BGL), an independent investment bank and financial advisory firm focused on the global middle market. There, Sargent leads the firm’s activities in industrial distribution.
I asked Kevin to share his thoughts on the immense volume of M&A we saw in industrial distribution last year, and why it outpaced the greater manufacturing sector.
“From a baseline business model standpoint, most distributors have very attractive cash flow dynamics. So, good margins efficient working capital and very low capex, and they’re largely scalable,” Sargent told me. “The distribution sector is also highly fragmented with a very large number of potential acquisition targets, really across the full-size spectrum that can fuel the growth the capital markets are looking for. So it’s a very attractive sector fundamentally. From an organic growth standpoint, there are very strong tailwinds driving the distribution sector.”
Sargent detailed that those tailwinds include federal investment in civil infrastructure like water management and wastewater, road and bridges, the power grid and more; reshoring activity; factory expansions; spending on warehouse equipment; sustainability investments; electrification, and more. All of these are potential product and services demand drivers for distributors in the years ahead.
Additionally, Sargent said, distribution is a “safer” investment opportunity for private equity firms right now compared to general manufacturing, given distribution’s lower fixed costs, cash flow dynamics and the fact that distribution wasn’t hit as hard by high federal interest rates compared to manufacturers.
“Typically, in times of recession or potential recession, investors and lenders look for safe harbors. The distribution sector was certainly a safe harbor in 2023,” Sargent said.
He added that while capital investment providers were more apt to put money to work with a distribution business than a manufacturer in 2023, he expects that to start normalizing in 2024.
Even so, Sargent expects 2024 to be another very good year for distribution M&A activity, though it will be difficult to match 2023’s level. But evidenced by the frenzy of deal announcements within the first three weeks of January, it’s certainly possible.
“There’s a lifecycle of distribution businesses that continues to repeat, as newer and upcoming businesses grow, maybe get acquired into a private equity consolidation model, and then ultimately up into a larger strategic or larger private equity firm. That lifecycle is going to continue for quite some time here,” he explained.
Along with his outlook for distribution dealmaking in 2024, we touched on the role that technology plays in today’s M&A arena and if his firm has historically seen any correlation between Presidential election years and reduced M&A activity.
Listen to the full episode via the audio player above, and check out our full library of MDM Podcast episodes here.
Think you’d be a good guest on the MDM Podcast or know someone who would be? Let us know at firstname.lastname@example.org.