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Ferguson to Buy Kennametal's Integrated Supply Unit

In a move that shifts the competitive landscape for the integrated supply market inNorth America, plumbing/PVF distributor Ferguson Enterprises is buying Kennametal's integrated supply business, Full Service Supply, for $41 million. FSS reported 2004 revenues of $138.4 million, serving 100 customers across 33 states in the USA and one province of < Canada. Ferguson's Integrated Systems Division manages the procurement of $225 million in MRO products/services for 30 plants nationwide. By most estimates, the deal creates the second largest integrated supply business behind Bruckner Supply, and unshackles FSS from the inherent channel conflict Kennametal had to manage against its other distribution channels.


The deal comes a few months after W.W. Grainger announced it was exiting the integrated supply business. Grainger lost about $1 million in 2004 on its integrated supply business on revenues of $211 million. Grainger said it would fulfill existing contracts, but not renew. That pool of integrated supply business takes on new meaning for the remaining competitors, and positions the newly combined FSS/Ferguson unit in a new light with combined sales of more than $350 million. Clearly, Ferguson must see growth opportunities in the purchase of the FSS business, which reported 2004 operating income of $800,000. (More on the financials and strategy in an upcoming MDM).


Interestingly, Ferguson's integrated supply customer list (click here to view partial customer list) includes a strong portfolio of metal-cutting customers, including several GE division plants.


Ferguson's Integrated Systems Division began in 1989 as one of the nation's first full service integrators. The division manages $70 million in inventory and services 600 point of use storage locations. Ferguson is the U.S.-based integrated supply and distribution subsidiary of Wolseley PLC, a $19-billion UK-based firm.


Full Service Supply provides integrated supply chain management and logistics to large and medium sized metalworking plants. FSS external sales increased $4.1 million or 12.8 percent to $36.3 million for the quarter ended Dec. 31, 2004 from $32.2 million for the prior year quarter. The increase in sales is primarily associated with organic growth. Operating income improved $0.7 million in the current year on improved sales volume.


For the six months ended Dec. 31, 2004, FSS external sales increased $8.7 million or 13.6 percent to $72.6 million from $63.9 million for the prior year period. The increase in sales is primarily associated with organic growth. Operating income improved $1.1 million in the current year on the improved sales volume.


Beginning in fiscal year 2006, the divestiture of FSS is expected to be accretive to Kennametal's margins and ROIC. As a part of the transaction, Kennametal will take an estimated $9 million pre-tax charge in the quarter ending Mar. 31, 2005, resulting in an earnings-per-share impact of about 18 cents.


Kennametal said it plans to use the proceeds of the sale for additional investment in its core consumable materials business and for further debt reduction. The disposition of this unit is in line with the continued execution of Kennametal's strategy to concentrate on its core businesses. The agreement with Ferguson includes a four-year supply contract with Kennametal that allows for continuity.


''We are very pleased with the agreement," said Markos Tambakeras, Kennametal chairman, president and CEO. "The divestiture allows us to focus on our core businesses while FSS is joining a company that can fully leverage its capabilities. Our goal was to find a strategic partner for FSS that could accelerate growth, add incremental value to customers and be a good home for FSS employees: Ferguson is a great match. Our agreement with Ferguson includes a four-year supply contract that allows for continuity and is a win-win for both Kennametal and Ferguson.''


The transaction is expected to be finalized in May 2005.


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