Earlier this week, HD Supply announced that its Construction & Industrial – White Cap division has agreed to acquired A.H. Harris – one of its largest competitors – in a deal valued at $380 million. It’s a major move in the commercial construction distribution sector – one that reinforces an emerging theme of developing specialized capabilities strategically in an increasingly digital marketplace.
“The acquisition of A.H. Harris will be the single largest transaction HD Supply Construction & Industrial has ever made, and it will strengthen HD Supply’s position as the premier distributor in specialty construction," HD Supply Construction & Industrial President John Stegeman told MDM. "The combined company will allow us to better serve our customers in New England, New York, New Jersey, Pennsylvania, Washington, DC, Baltimore, Virginia and the Carolinas.”
A.H. Harris is likely the largest of HD Supply C&I’s competitors; most construction supplies distributors are privately held, so we have to speculate on the exact size. It’s a logical marriage between two former rivals that enhances HD Supply’s strengths in the marketplace. It expands its national footprint, with an ability to attract more large, regional and national customers as well as consolidate purchases – and to some degree inventories – across its supply base. Within the region, the combination strengthens the combined companies’ marketing and merchandising capabilities.
If this follows the pattern of similar sized regional deals, it’s likely most of the opportunities to eliminate redundancies are in administrative and corporate roles, while the revenue-producing locations and teams will combine to create a larger pool of sales and customer service employees, inventories and branches. That should help improve operating leverage based on the complementary market coverage, provided the company can retain key individuals post-integration.
Hartford, CT-based A.H. Harris operates the majority of its branches where Atlanta, GA-based HD Supply C&I has very few brick-and-mortar locations:
|HD Supply Construction & Industrial Locations in the Northeast
(Map data ©2018 Google, EasyMapMaker)
A.H. Harris Locations in the Northeast
HD Supply C&I operates 166 locations in the U.S., meaning just 10 percent of its network is in states where 100 percent of A.H. Harris’ 52 branches are located (see table below). The biggest overlap occurs in the southern part of A.H. Harris’s market area – Virginia, Maryland and North Carolina. Overall, A.H. Harris operates more than three times as many locations in states where they overlap. Additionally, even when located in the same states, branches from the two companies are not usually close together or even in the same cities. This is about as clean a geographic “bolt-on” acquisition you are likely to find in a deal between major distributors.
Overlap: A.H. Harris/HD Supply C&I branches, Northeast (12 states):
|State||A.H. Harris||HDS C&I|
Some may ask if expansion by acquiring adjacent branch-based distribution locations is still smart in the digital age. Like many issues in distribution, it depends on the industry sector; for the construction supply market these distributors serve, local brick-and-mortar locations will continue to be important. Here’s why:
- Construction materials orders tend to be heavy, bulky and difficult to deliver. Both of these companies operate fleets of flatbed trucks, often equipped with jobsite-specific forklifts, driven by specialists who know how to deliver on large and complex construction sites. These orders are high-dollar and difficult to consolidate into large, regional distribution centers and not easily delivered via common carrier.
- Every new commercial structure is a unique combination of materials. Large-scale DCs are efficient when they can be stocked with items that have a predictable demand curve; this is not the case in the commercial construction market HD Supply C&I and A.H. Harris serve. The Apple headquarters building in Cupertino, CA, shares few materials in common with the Atlanta airport expansion project. That’s why construction supplies distributors customize inventories in every branch to serve a constantly changing mix of local projects. This creates a high hurdle for pure online competitors and makes it challenging to create digital capabilities.
That’s not to say digital capabilities aren’t important in this market, but it’s likely they will be quite different from what is required in other sectors. A.H. Harris has not invested heavily in this area, based on its website (www.ahharris.com), which can’t handle transactions and doesn’t offer individual product listings.
In addition, the company has not regularly produced marketing materials, according to those familiar with this marketplace. C&I, on the other hand, has invested heavily in both marketing and digital tools and leverages an impressive level of IT capabilities with the rest of HD Supply. HD Supply C&I White Cap’s website is www.whitecap.com. With this acquisition, A.H. Harris gains access to the underlying systems and data to compete in an era in which strong digital capabilities are increasingly important.
The bottom line: this is a great fit between two companies just beginning to compete in each other’s “dirt.” Joining forces is a better solution for both companies because of the relatively small amount of geographic overlap combined with strong synergies.
Read more about the factors that have transformed distribution M&A and how companies can succeed in the new market in our Distribution M&A Playbook.