During the midsummer doldrums, two big acquisition deals announced in the past few weeks are worth analyzing:
- Grainger plans to acquire Cromwell Group, the largest independent MRO distributor in the UK, for a little more than Cromwell’s annual revenue of US$442 million, or about 11x EBITDA margins.
- The Home Depot plans to buy Interline Brands for $1.6 billion, just under its 2014 annual revenue of $1.7 billion.
Both these deals break some current molds and at least start to paint a picture for how M&A might look different going forward. You could define normal the past few years as a continuation of portfolio building in the U.S. by European distributors, such as Sonepar, Wurth and others. For North American companies, it has been a feeding frenzy across a few strategic opportunity levels: grow market share by geographic acquisition within a core product portfolio or grow wallet share by expanding into other product categories.
Overall, it has been a seller’s market, where the pool of highly attractive acquisition targets within many highly fragmented verticals is getting picked pretty hard. Financial market conditions continue to fuel record levels of demand.
Both the Grainger and Home Depot deals push this envelope more than a bit by exploring new markets and channels for growth opportunity through acquisition.
After years of M&A acquisition activity by European companies buying up industrial distribution capacity in North America, Grainger’s big-time entry into the UK market turns the tide, with an e-commerce beachhead twist to it. Grainger sees adoption of online sales lagging Europe (Cromwell’s digital sales are relatively low). Grainger expects to boost its German online business as well as in the UK by using Zoro. It’s a pure e-commerce site targeted at smaller customers, and modeled on its predecessor in Japan, MonataRO, which Grainger holds a stake in. Grainger has grown Zoro in the U.S. from startup to $300 million in four years.
At one level you could say this move by Grainger is merely an extension of its successful multichannel growth strategy, but it is a bit more creative than recent add-ons in the way it integrates the pieces.
As for Home Depot, its more definitive move back into B2B from B2C definitely gets it outside the retail box and beyond services to build a growth strategy into larger professional customers and markets with higher growth potential and stronger service components.
I expect we will continue to see more creative crossovers across these dimensions in the deals ahead that will change the shape of competitors.