Disclosure: This blog’s author, MDM VP Sales, Analytics & e-Business John Gunderson, was part of the management team at HD Supply from 2011 to 2013 when they were owned by a group of private equity backers, including Clayton, Dubilier & Rice, prior to becoming a publicly-traded company. He remained at HD Supply and was on the leadership transition team for the sale of HD Supply Power Solutions to Anixter from 2014- 2017.
It seems like a long time ago – end of October – that Anixter International Inc. (NYSE: AXE) announced it was going private in a $3.8-billion deal to an affiliate of private-equity firm Clayton, Dubilier & Rice (CD&R) in an all-cash buyout at $81 per Anixter share. That’s a 13% premium over Anixter share price on Oct. 29, 2019. A lot has happened since. Less than two months later, Anixter shareholders became an even happier lot with a strategic buyer throwing its hat in December – a couple of times.
WESCO International, Inc., (NYSE: WCC) upped the ante with a $90-per-share offer announced on Dec. 24 (nice timing!), and it’s one of the biggest deals to hit the electrical industry in a while. For CD&R, it’s back to the future again as a previous owner of one of Anixter’s business segments.
It’s not often that the stars align to have financial and strategic buyers mano a mano in deals this size. The financial metrics often favor one side or the other. So there’s an added competitive dimension to this deal that’s a bit outside the normal lanes. The fact that WESCO is sweetening the pot indicates the strategic value the company puts on adding Anixter to its portfolio, because CD&R’s cash war chest is top shelf.
What’s interesting to me as a 25-year electrical distribution industry vet is how Anixter can provide very complementary – yet different – strengths to these two suitors. Here’s my take on what the impact will be on the electrical distribution industry.
Anixter Deal Play-by-Play
Following the Dec. 24 announcement of WESCO’s $90-per-share offer, two days later it raised its bid to $93.50 per share in cash and stock. A week later, on Jan. 3, it raised again to $97 per share – $63 per share in cash and then a combination of share formulas (details of their offer are here). There are no public counter offers by CD&R as of this blog.
There’s likely a lot more to come on this deal. CD&R baked in a $45-million break-up fee if a sweeter offer appeared (it did). Also, certain stockholders of Anixter, including entities associated with Sam Zell, Chairman of the Anixter Board, which own approximately 9% of the outstanding shares of Anixter common stock, have entered into a voting agreement with CD&R, pursuant to which they have agreed, among other things, to vote their shares of Anixter common stock in favor of the merger.
Let's look back at the company histories first to parse the impacts of a deal. CD&R is back in the bidding for a part of Anixter they were a former PE investor in, specifically the HD Supply Power Solutions business that is now part of Anixter’s Electrical & Electronic Solutions (EES) and Utility businesses.
The Home Depot in 2005-2006 went on an aggressive acquisition mode, entering the B2B distribution space buying companies like Hughes Supply, Edson, SESCO in Canada, Facilities Maintenance, White Cap and National Waterworks. At its peak, the revenue run rate was north of $12 billion and assembled in a relatively short time. Retailer The Home Depot’s bold entry into the distribution market during the leadership of Bob Nardelli was the biggest news to hit distribution in years.
I remember going to distributor association meetings and hearing people openly talk about if/when their company was going to be acquired by The Home Depot. We all joked with each other on needing to get properly sized for an orange apron. Then almost as quickly as it started, new leadership at The Home Depot decided to strategically exit distribution markets. They began divesting their acquisitions in 2007 to a group of PE investors including CD&R.
This spin-off company was named HD Supply, and over the next few years the private equity group sold, combined and streamlined the company prior to taking HD Supply public in 2013. At that time HD Supply was organized under four major divisions – Facilities Maintenance, White Cap-Construction & Industrial, Waterworks, and Power Solutions.
In October 2015, HD Supply sold the Power Solutions business to Anixter. This combination Utility- and Construction-based electrical business is now a major part of Anixter’s Electrical & Electronic Solutions (EES) and Utility Power Solutions (UPS) divisions.
If you follow that bouncing ball, you can see that CD&R is potentially repurchasing a part of Anixter they already owned for five to six years. To make it even more interesting, CD&R acquired the HD Supply Waterworks division in 2017 (now Core & Main); they have a track record of re-acquiring part of HD supply already. And there's a final historical twist at play here – CD&R was a key investor in helping Westinghouse become WESCO when they went public in the 1990s.
Now, let’s talk about WESCO’s position. The deal would more than double WESCO's revenues; their 2018 annual sales were approximately $8.2 billion while Anixter 2018 revenues were $8.4 billion.The WESCO team knows all three divisions of Anixter Network & Security Solutions (NSS), Electrical & Electronic Solutions (EES) and Utility Power Solutions (UPS) divisions from a competitor’s perspective. WESCO has been making investments in datacomm/security (what Anixter calls NSS) with a series of acquisitions and line expansions across their North American footprint for over a decade (WESCO’s major acquisitions included Communication Supply Corp. in 2006).
They know what Anixter calls their EES business intimately across North America based on their national electrical distribution footprint. WESCO and Anixter are both two of the largest distributors in the Utility channel. This specialized electrical distribution channel is something both companies know as well as any distributor in North America.
WESCO and Anixter have been competing day-in and day-out for decades, and have many employees who once worked for one and now work for the other. They intimately know the Anixter and electrical business.
WESCO stated that the acquisition would create more than $200 million in operational savings and mutual synergies, including “a reduction in corporate and regional overhead, including duplicative public company costs, branch and distribution center optimization, and efficiencies in procurement, field operations and supply chain. In addition, the combined company would be well-positioned to enhance growth by providing cross-selling opportunities of complementary product offerings to its expanded customer base.”
The Bottom Line
It will be interesting to see which suitor gets chosen, as both know very well what they are buying and have the operational experience to make the marriage successful. In terms of what it means to the industry, if CD&R acquires Anixter my prediction is the impact may be more business as usual in terms of category management. The analogy I would use is that it would be a small rock getting thrown into the pond that creates some ripples. But keep in mind that Anixter reported 2018 sales of $8.4 billion, so those are pretty big ripples in anyone’s book of business. My point is that the impact will be more additive than disruptive to competitors and suppliers alike.
If WESCO is the acquirer, the impact on manufacturers and competing distributors will be interesting to watch. One of the first impacts of a combined Anixter-WESCO would be to look at the Strategic Business Agreements that both have in place with specific manufacturers across major product categories. There would likely be some significant supplier realignment shifts in purchases to the best strategic agreement. That deal scenario would be like tossing a bigger rock in the electrical and datacomm products distribution pond that would create some waves – both in disruptive impacts and opportunity – for suppliers and competitors alike. Stay tuned!
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