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Deal Analysis: Essendant and S.P. Richards Merger Offers Hope and Time

Deal Analysis: Essendant and S.P. Richards Merger Offers Hope and Time

April 13, 2018

As reported by MDM yesterday, Essendant and Genuine Parts Company have entered into a merger agreement to combine Essendant and GPC’s S.P. Richards business in a deal valued at $680 million, including a one-time cash payment to GPC of $347 million. The merged business products wholesaler has pro forma 2017 net sales of about $7 billion and more than $200 million in adjusted EBITDA. It elevates the long-time competitors serving independent office-products dealers into the top tier of the increasingly brutal business products channel.

The deal buys Essendant time to build a differentiation strategy to combat a long list of competitors – digital, retail and otherwise – that have decimated traditional distribution channels for office products. Those in the sector view the deal as practically inevitable – a combination of competitors that serve a shared market of smaller, independent office products dealers.

It’s a strong exit strategy for GPC, with $16 billion in 2017 revenues, allowing it to focus on strengthening capabilities in automotive, industrial and electrical markets with NAPA (53 percent of revenues), Motion Industries (35 percent of revenues) and EIS (5 percent of revenues). SPR currently makes up 12 percent of that pie. Of the sectors GPC operates in, SPR’s traditional customers of smaller independent office products dealers are perhaps the most vulnerable to the entry of disruptive competitors over the past ten years.

As margins have collapsed in a market now crowded with Staples, Office Depot, Amazon, Costco, Sam’s Club, Walmart, Target and strengthening marketing alliances for independents, both Essendant and SPR have to address their cost-to-serve models. The deal provides obvious synergies of shared services as well as branch and resource consolidation. The question is whether the two companies­ can act quickly enough to extract competitive advantage in this climate.

Essendant Image 1

Source: Essendant-S.P. Richards Merger Announcement

The cultures of the two companies could work against building that strategic bridge to the future; they are at opposite ends of the spectrum and likely pose the biggest question mark for how well the combination can create value. S.P. Richards has a 160-year-old legacy with a more traditional distribution model of fixed costs and outside sales that has been a legacy provider to smaller independent dealers.

Essendant, on the other hand, has been in a ten-year transformative mode to combat the attacks from digital and retail disruptors and diversify its core office products business. That began with the acquisition of ORS Nasco, a pure wholesaler of industrial, welding and facility maintenance products in 2007. In 2010, Essendant acquired MBS Dev, a software company that was brought on to develop value-added solutions and offer stronger marketing platforms for its customers. More recent acquisitions strengthened its e-commerce platforms and diversified its customer segments into automotive sectors.

Part of Essendant’s transformation has been to build digital platform capability to serve as the fulfillment arm of online marketers as it invested in technology and upgraded its distribution centers. That’s been a two-edged sword as it has balanced relationships with traditional channels and digital disruptors.

More recently, the industry’s focus has been to survive Amazon’s increasing market share gains in the commodities of office products as the industry has been in a race to the level of near-zero margins. The more adaptive companies in this arena are building models that shift dramatically to unique and value-add services, with product sales as the door opener and not the revenue generator. The question for this combined entity is how quickly it can transform its new infrastructure to build its unique value proposition in a messy marketplace.

The opportunity that Essendant/SP Richards now has is to build an integrated channel model that was not on the table when these two companies were competitors. Historically, both companies have supported their dealers in M&A activity to retain the business. Essendant now has the capability to build out what is probably best described as a franchise multi-sided model that combines characteristics of an Ace Hardware model with a broader marketplace model. The “new” Essendant can aggregate the unique services and last-mile capabilities of its dealer network, while building deeper partnerships with Amazon and other digital marketers with a value-added proposition for complete customer coverage.

Since we are just into baseball season, let’s sum it up this way: the combination of Essendant and S. P. Richards solves some immediate problems for both managers; the big question is whether the new team runs out of innings before it learns how to play together. And it’s definitely not the same old ballgame.

Deal Structure

The transaction is structured as a Reverse Morris Trust, where GPC separates S.P. Richards into a standalone company in a spin-off to GPC shareholders. That will immediately be followed by the merger of Essendant and the newly spun-off company. The transaction implies a valuation of S.P. Richards of approximately $680 million, reflecting the value of Essendant shares to be issued at closing plus one-time cash payments to GPC of $347 million. At close, GPC shareholders will own 51 percent and Essendant shareholders will own 49 percent of the combined company on a diluted basis, with 80 million diluted shares outstanding.

Essendant Image 2

Source: Essendant-S.P. Richards Merger Announcement

Investment firm Blackrock holds major positions in both companies, owning more than 10 percent of the stock in both Essendant and Genuine Parts. Citigroup Global Markets was the financial advisor for Essendant; J.P. Morgan was the financial advisor to Genuine Parts Company.

The deal is expected to close by the end of 2018, subject to FTC approval. The industry will be watching this closely. The environment has shifted quickly just in the last few years, as Amazon Business has increased its foothold, large nationals have bought dealers and increased direct selling, and overall pricing transparency has increased. The FTC shut down Staples’ attempted acquisition of Office Depot in 2015, arguing that the combination would lead to higher prices for office supplies. But both political and market factors have shifted quickly, and the relative market positions of Essendant and SPR make for a significantly different story for the competitive impact to their respective customers.

 

 

© 2019 Gale Media, Inc.

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