Why have three investors been raising the price for Industrial Distribution Group (IDG), the traditional whipping post of the investment community?
Last year, when IDG's board pursued an exit strategy to free itself from the constraints of public ownership, the M&A market in distribution was still near its peak. In a year's time, we have shifted dramatically from a financial frenzy to a quieter, more strategic buyer's market. In today's risk-averse debt markets, show me the money has taken on new meaning in the bidding war for IDG.
The three bidders active in this deal -Platinum Equity (owns Strategic Distribution), Luther King Capital Management (owns 15 percent of IDG stock), and WESCO (owns Bruckner Supply) -know the strengths and weaknesses in IDG. Based on IDG's performance, the winning bidder has to take the long-term approach to extracting value from this deal.
IDG's history is arguably a Murphy's Law case study in roll-ups. The company dealt -very publicly -with one issue after another. IDG formed with an initial public offering in 1997 with the roll-up of nine strong regional companies. The company had annual sales of $250 million. By the end of 1999, the company had grown through acquisition to 13 hub operating companies and 65 operating locations in about half of the top 75 U.S. industrial markets, with $542 million in sales. But the company suffered major growing pains.
It went through a series of presidents/CEOs trying to align independent former owners. It wrote off $5.6-million pre-tax in 1999, part of litigation involving one of IDG's founding companies, as well as severance costs for terminated executives. In 2000, it wrote off $15.1 million in its failed implementation of J.D. Edwards software just as the industrial economy was tanking and its customer base was shrinking.
But IDG, unlike many other roll-ups, was a survivor. The three bidders in this deal are either direct competitors or a significant owner of IDG. In the tightening industrial and integrated supply markets, we are seeing how these assets are being valued by these strategic bidders. WESCO gave its answer by withdrawing when the stakes were raised earlier in the week.
An added wrinkle is that IDG's lower-margin integrated supply business has increasingly accounted for more of its revenues. It just stretches probability for payback further out. At least two buyers feel the rewards are there in this higher-risk environment.