Sonepar’s recent acquisition of Industrial Distribution Group is, in many ways, an end mark on a 20-year timeline of industry trends, challenges and shifts, all rolled into one deal. Where shall we begin? The best place is back to the future.
The acquisition puts an exclamation point on a few of the biggest deals in each of the previous two decades. The first was in 1997, when nine general-line industrial distribution companies merged into a $251-million national public company, Industrial Distribution Group, with 41 operating locations in 37 cities. The core of the group was its former private-entity namesake, a $91-million company based in Georgia. They were all members of Affiliated Distributors and had been members of a previous marketing group. It was a bold strategic move at a time when there was much uncertainty about the viability of traditional distribution models. There were relatively high levels of fear and uncertainty, depending on your market position.
That deal was at a time when the industry was more fragmented but in a strong growth cycle, and alliances and marketing groups were strengthening as competitive tools to level the playing field against new and evolving threats. Those threats included growing national competitors, integrated supply, competition for national account business and what was then termed “electronic Web commerce.” (Sounds quaint now, doesn’t it?) A few nationals, such as MSC Industrial Direct, were taking share with higher margins and strong growth rates. The playing fields were still largely vertical, though integrated supply was pounding at the fences.
One of the consolidation survival strategies for small- to medium-sized companies that emerged across many distribution verticals was the initial public offering roll-up. A group of companies, typically complementary in geography, combine into a single holding company to become the platform. Subsequent acquisitions are made to scale the company. By 1998, there were at least nine IPO roll-ups across industrial metal service centers, floral, electrical, fastener, HVACR and other distribution sectors.
IDG’s history is arguably a Murphy’s Law case study in roll-ups. The company dealt – very publicly – with one issue after another. By the end of 1999, the company had grown through acquisition to 13 hub operating companies and 65 operating locations in about half of the top 75 U.S. industrial markets, with $542 million in sales. But the company suffered major growing pains.
It went through a series of presidents/CEOs trying to align independent former owners. It wrote off $5.6 million pre-tax in 1999, part of litigation involving one of IDG’s founding companies, as well as severance costs for terminated executives. In 2000, it wrote off $15 million in its failed implementation of J.D. Edwards software just as the industrial economy was tanking and its customer base was shrinking.
But IDG, unlike many other roll-ups, was a survivor. The company sought buyers in 2007, the peak of an M&A cycle, in an effort to free itself from the constraints of public ownership, recapitalize and streamline. By the time the company went onto the market in 2008, the peak had passed. There was a bidding war between two private equity groups and WESCO. Luther King Capital Management, IDG’s largest stockholder with 15 percent of its shares, won the war, paying more than $135 million. IDG’s annual revenues at the time were about $525 million.
Since the deep recession of 2008-2009, IDG has significantly strengthened its integrated supply business with unique service capabilities.
Separately, Hagemeyer in 1999 and 2000 brought three strong companies in their respective product areas – Cameron and Barkley (MRO), Tristate Electrical and Vallen Safety Supply – into an arguably strong growth platform for integrated supply. In 2001, CamBar bought Briggs-Weaver, a one-time flagship Texas distributor that had fallen prey to some of the industry competition described above. European distribution companies were investing in North American growth, particularly in electrical distribution. By 2002, Hagemeyer North America reached $1.9 billion in sales. Hagemeyer also experienced a range of integration issues including accounting glitches.
By 2007, through additional acquisitions and growth,
the company estimated U.S. annual revenues at $3 billion. In 2008, Rexel bought Hagemeyer, and, as part of the deal, spun off select business units to Sonepar. Later that year, Sonepar acquired the North American operations of Hagemeyer. Since then, Sonepar continued to add to its North American footprint, mostly in electrical distribution, but increasingly adding capability in industrial MRO.
New M&A Cycle Peak
Five years out of the recession, a unique climate has made for a strong sellers’ market, as reported valuations are back to and even exceeding pre-recession levels, according to a range of MDM sources. IDG effectively repositioned its financials for an exit strategy for Luther King six years into its investment.
Acquisition activity in distribution increased for both strategic and private equity buyers in 2014 because the industry has seen a convergence of several factors, according to Tom Lange, managing director of the distribution group for investment banking firm Baird. Baird served as the financial advisor for Industrial Distribution Group when it was acquired by Sonepar. First, the financing environment is “terrific,” Lange says. “There’s an ability to fund M&A activity at historically low interest rates.” Combine that with the fact that valuations, in general, have been very attractive, creating compelling reasons for owners to sell.
The third reason, according to Lange, is that strategic buyers are keenly focused on expanding both geographically and their product and solution capabilities. The acquisition of Industrial Distribution Group by Sonepar is a great example of this third reason, Lange says.
“IDG is really a leading industrial MROP platform with three integrated businesses,” he says. First, it’s a top integrated supply business; second, it’s a national industrial distributor with expertise in cutting tools and abrasives; and third, it has a rapidly growing energy business serving upstream customers in Texas, Oklahoma and the Gulf Coast region.
Those three elements are highly complementary to Sonepar North America’s existing product and service offering, particularly through its Hagemeyer North America business.
“From a product standpoint, both sides agree there’s terrific opportunity, given the strength on the Hagemeyer side in terms of safety and Sonepar in electrical,” Lange says. “Combine that with IDG’s strength in cutting tools and abrasives.”
IDG has also created a solid foundation for continuing growth across its businesses, particularly through the integrated supply and the oilfield supply businesses. While regional right now, the oilfield business could be expanded into a national business serving other developing oil and natural gas areas.
“When you combine the growth dynamic and some of the integrated supply dynamic, IDG was a truly unique asset,” says Jason Kliewer, managing director for Baird, “but it fits with the broader theme around consolidation in distribution in that the number of middle market or upper middle market distributors is actually very limited.”
The scarcity of targets in this valuation band – “You can pretty much count them on one hand,” Kliewer says – also increases the attractiveness of such deals. IDG’s established scale and growth strategy allows Sonepar to quickly build on the synergies between the two companies.
What Goes Around…
Had you suggested at a cocktail party in 1997 that IDG and Cameron Barkley might merge some day, you would have been laughed at. There was a fierce competitive streak in both companies. But the combination in 2014 brings together strong integrated supply expertise and a customer base served by both companies that goes back 20 years or more.
Strategically, IDG’s hard-won and strong operational focus over the past 10 years since going private, particularly in its recent growth in key segments and integrated supply, offers much value to Sonepar’s Hagemeyer holdings.
As noted in the comments by Baird analysts, the candidates for mergers at the larger distribution companies are part of a smaller club. But you have to wonder whether Sonepar will raise the ante by inviting new players, with power transmission a likely tangential product category based on segment size, to the table.