The 2020 Mid-Year Economic Update_long

Commentary: Tougher Numbers in 2008

Home Depot bought Hughes Supply in January 2006 with an EBITDA valuation above 12X, a number still ringing in the ears of many distributors. A scant year later HD announced its intentions to focus on retail and explore alternatives for its $12-billion distribution unit. It sold the unit this past June.


As distributors ring in this year, the competitive landscape looks vastly different than even six months ago. While there is still a lot of private equity money searching for deals in distribution, debt markets have tightened.

As a result, valuations are dropping fast, and the level of deal-making activity dropped significantly in the last quarter of 2007. In 2008, we will likely see strategic buyers execute smaller add-ons, rather than the blockbuster deals spawned ...

Home Depot bought Hughes Supply in January 2006 with an EBITDA valuation above 12X, a number still ringing in the ears of many distributors. A scant year later HD announced its intentions to focus on retail and explore alternatives for its $12-billion distribution unit. It sold the unit this past June.

As distributors ring in this year, the competitive landscape looks vastly different than even six months ago. While there is still a lot of private equity money searching for deals in distribution, debt markets have tightened.

As a result, valuations are dropping fast, and the level of deal-making activity dropped significantly in the last quarter of 2007. In 2008, we will likely see strategic buyers execute smaller add-ons, rather than the blockbuster deals spawned by an overheated market of the past few years.

So where exactly are opportunities likely to emerge in 2008? Interestingly, the playing field seems to be leveling. Smaller distributors have a better opportunity to make strategic acquisitions as competition has cooled significantly. And it’s important to keep in mind that valuations are still at historically high levels.

Competition is still out there in the form of traditional industry consolidators that continue to expand through careful (and frugal) acquisition strategies. Also, conditions are extremely favorable, thanks to the low dollar, for European distributors to continue their consolidation of select distribution markets in North America.

Regardless, the turbulent economy will likely keep M&A activity low, with everyone working hard just to make the numbers, much less make the numbers work on an acquisition. That said, there will always be distributors who find opportunity in market corrections.

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