Speculation over increased merger and acquisition activity has created more buzz than actual transactions among distributors, but the mere projection of what could happen continues to intensify. While October lacked the previous month’s splashy deals, such as electrical distribution giant Sonepar’s agreement to purchase Industrial Distribution Group, some eye-catching comments from a top industry executive and some notable findings from a Deloitte poll portend big news on the M&A front.
Toss in a handful of recent transactions in the industry, including a flurry of national and international purchases in the building materials sector, and the M&A climate appears poised to flourish.
When MSC Industrial Direct reported fiscal-year earnings last month, President and CEO Erik Gershwind spoke repeatedly about the company’s 2013 purchase of Barnes Group’s North American distribution business, how its integration is progressing and how the acquisition remains a blueprint for future deals.
“Competitive activity in our industry remains fierce,” Gershwind told analysts during the company’s earnings call. “We are, of course, mindful of new entrants into the MRO space and into our core metalworking business. We are paying close attention and are laser-focused on sustaining our leadership position. This is why we will not back off with important growth investments or our actions to enhance our value proposition.
“I feel very good about how MSC is positioned to succeed in the next decade as the consolidation story accelerates.”
The consolidation story isn’t ending anytime soon, according to a recent Deloitte poll. The merger and acquisition market for mid-sized, privately held companies is expected to be “improving” or “very aggressive” in the next 12 months, according to 43.8 percent of respondents to the poll. And nearly half of them (46.4 percent) say their companies are prepared to entertain an offer immediately from a hypothetical “perfect buyer.”
“As company valuations, share prices and cash-on-hand liquidity are generally on an upswing, many sellers have more options today than in the past five years to extract value from their companies – sometimes without selling outright,” Phil Colaco, managing director, Deloitte Corporate Finance LLC, said in the release that accompanied the poll. “Some mid-market business owners are leveraging debt recapitalization to pay dividends that buy out minority shareholders. Others are recapitalizing to extract capital without giving up total control or ownership.”
According to the Deloitte poll, although the current M&A market is providing opportunities for owners of midmarket firms to finance investments or extract capital, the opportunity does not come without risk, and companies should be prepared for an M&A scenario.
“Thoughtful planning is crucial to a successful transaction” said Kevan Flanigan, national managing director, Deloitte Corporate Finance LLC. “Don’t try to time the market too closely or put too great a focus on driving value for the transaction at the expense of current operations and strategy. Focus your efforts on: retaining advisors; evaluating management succession plans; assessing tax, personal and business implications of potential liquidity alternatives; and, identifying potential value-erosion areas before negotiations commence. You created a business plan to start your business – don’t forget to create one to sell it.”
Acquisition activity wasn’t completely absent during October, with several deals happening in the building materials sector.
Beacon Roofing Supply, Herndon, VA, completed two acquisitions in October, strengthening its presence in both Texas and New England. The company first acquired Applicators Sales & Service, a Portland, ME, distributor of residential roofing, siding, windows and related accessories. Applicators, which operates four branches in Maine and one in New Hampshire, has annual sales of $48 million. Beacon later acquired Wholesale Roofing Supply, a Dallas, TX, distributor of residential roofing materials whose sales are expected to hit $34 million in 2014.
Also in the building materials sector, Builders FirstSource acquired Trim Tech of Austin Inc., Distribution International Inc. acquired Mechanical Insulation Supply Inc., and US LBM Holdings acquired Standard Companies Inc.
The M&A trend in the buildings materials sector went global in October as well, with Advent International acquiring Belgian manufacturer Corialis and European building materials supplier Saint-Gobain acquiring Atlas Zimpara.