PVF distributors McJunkin Corp. and Red Man Tool and Supply will merge to form a $3-plus billion company. Private equity has a controlling interest in McJunkin, meaning the deal, to be finalized in September, is probably just the first of many steps in the companies’plans for growth.
The recently announced merger plan between leading pipe, valve and fittings (PVF) distributors McJunkin Corp. and Red Man Tool and Supply highlights the impact private equity is having in distribution. The deal would form a $3-plus billion company and largest U.S. PVF distributor.
Goldman Sachs owns a majority share of McJunkin, which was family-owned and -founded. One industry expert says the share is close to 60 percent, giving Goldman Sachs a controlling interest.
That infusion of cash in January 2007 was meant to give McJunkin greater opportunities to grow, says Beth Morrison, McJunkin spokesperson. The company with Red Man has plans to continue to grow by acquisition, and it is possible McJunkin could eventually be taken public -one of the ways investment firms have to cash out of an investment. As we’ve told our employees -that is an option,” Morrison says.
This deal, combined with the recent announcement that a trio of private equity firms are buying HD Supply for $10.3 billion, “shows you the forays private equity firms have made in the PVF industry and we don’t see any end to that,” says PVF industry veteran Don Caffee.
It’s of course too early to determine the next move or speculate on the impact of the merger of Red Man and McJunkin. Those in the PVF industry say that the market is still fragmented and diverse enough that the impact is likely to be light.
“It’s concentrating financial power in the two leading PVF distributors in the industry,” says industry expert Morris Beschloss, who is a contributing editor to The Wholesaler, a trade publication that covers the PVF industry. McJunkin-Red Man will also have significant purchasing power.
“But the guys who are smaller or niche players will stay in their areas and do well. It’s not going to put them out of business,” says Caffee, founder of Valpers Performance Partners Inc., a Houston-based consulting firm for the fluid-flow industry.
The overall MRO PVF market in 2006, according to estimates from Industrial Market Information, Minneapolis, MN, was $17.5 billion. This means McJunkin-Red Man Corp. (the firm’s planned name) would have as much as 20 percent of the market; Wilson Industries, another big PVF player, with nearly $2 billion in sales, could have as much as 12 percent. Together the three have about a third of that market.
Ferguson Enterprises, a company of UK-based Wolseley, holds part of the market as well. HD Supply has grown its sales in PVF, augmented by purchasing Hughes Supply in January 2006 ($5.5 billion in revenues at the time). In its final financial report in March 2006, Hughes reported its industrial PVF unit had about $500 million in sales.
When asked if $3 billion was a safe estimate for the combined size of McJunkin and Red Man, spokesperson Morrison said the number was conservative.
Based on the growth rate of the market and commodity price increases, the sales are actually probably much higher. In 2005, the overall PVF market was $13.5 billion, and two years earlier, it was $11.2, according to IMI estimates. That means the market for MRO PVF has grown by nearly 30 percent from 2005 to 2006, and grew by 56 percent from 2003 to 2006.
Despite the fact that this deal arguably forms the largest company in the space, Beschloss says that the deal is not worrying many in the industry. “These companies have a sense of responsibility toward the industry,” he says, compared with having an outsider come into the space. “They are maintaining the culture of the companies, and they know how to deal with suppliers and customers. McJunkin and Red Man have always been great industry citizens.”
The two distributors complement each other. McJunkin serves mainly what’s called the “downstream” market, distributing PVF and other products to refiners and others in the supply chain from the ground to the refiners’gates. Red Man on the other hand focuses primarily on the “upstream” market, serving driller and production companies.
The two have few locations in common. The combined company will challenge Wilson Industries by making moves to strengthen its upstream services, which is Wilson’s main market, Beschloss says.
Shortly after Goldman Sachs invested in McJunkin, the distributor expanded its presence in the upstream market with its purchase of Midway-Tri-State Corp., Jackson, MI.
Both Red Man and McJunkin have rich family roots, though McJunkin is roughly 50 years older. McJunkin was founded eight decades ago as the McJunkin Supply Company by brothers-in-law Jerry McJunkin and Henry Wehrle in Charleston, WV, where its headquarters remain.
It was founded to supply the oil and gas industry, but currently serves several major industries including chemical & petrochemical, mining, food and beverage process and pharmaceutical.
In the years that followed its founding, the distributor served many roles, including converting its forge shop in 1943 to build bomb casings for the war effort. It also has pursued joint ventures with several companies, including one with Appalachian Pipe and Supply forming McApple in 1989.
In 2001, McJunkin launched a strategic growth plan to make five acquisitions in two years, and pursue aggressive organic growth initiatives. By 2005, sales had grown to more than $1.4 billion. McJunkin is in more than 100 locations in 28 states.
Red Man’s Quick Growth
Red Man was founded by Lewis Ketchum, a Delaware Tribe Native American Indian, in 1977. The company began as a distributor of oil country tubular goods after acquiring the distributorships of U.S. Steel Corp. and Lone Star Steel Company. Red Man moved into the general oilfield supply business by opening its first supply store in Houston, TX.
In 1987, Red Man started its growth spurt, buying the 22 supply stores of Superior Supply Co., two from American Energy Tubular and later Arrow Pump Supply Inc. assets. It’s acquired at least half a dozen companies since 1990. Most recently, it acquired Bear Tubular, Marcus Hook, PA, a $15 million piping distributor in the Northeast U.S.
Red Man now has more than 70 locations, pre-McJunkin, throughout the West and Southwest U.S.
Together McJunkin and Red Man will have about 200 locations. In a not-so-common move, Charleston, WV, and Tulsa, OK, will serve as co-headquarters for the new company, and McJunkin Corporation CEO and President H.B. Wehrle III and Red Man Pipe and Supply Company President and CEO Craig Ketchum will serve as Co-CEOs.
The following timelines do not include all acquisitions made. McJunkin has made about a dozen acquisitions since 1987. Red Man has made nine in the same period. Both are privately-held companies.
1921 – McJunkin Supply Company is formed as a distributor to oil and gas industry
1969 – McJunkin has 29 branches in 18 states with sales approaching $60M
1987 – Buys Grant Supply ($100M in sales)
1990s – Increases focus on technology and integrated supply
1992 – Buys Republic Supply Co. ($80M in sales)
2001 – Strategic growth plan launched; buys PVF assets of Fairmont Supply Co.
2005 – Sales reach more than $1.5B
Jan. 2007 – Investment arm of Goldman Sachs buys majority share
Apr. 2007 – Buys Midway/Tri-State Corp., building its upstream business
July 2007 – McJunkin and Red Man announce merger plans; sales estimated at more than $2B
Red Man Timeline
1977 – Red Man Pipe and Supply Co. is formed as distributor of oil country tubular goods
1987 – Buys Superior Supply Co. (22 stores)
1999 – Buys R.J. Gallagher Co., building its downstream business
2002 – Buys Wesco Equipment Inc., strengthening position in valve automation market
2006 – Buys Bear Tubular ($15M in sales)
2007 – McJunkin and Red Man announce merger plans; sales estimated as more than $1B
Source: McJunkin Corp. and Red Man Pipe and Supply Co.