The 2020 Mid-Year Economic Update_long

MSC to Buy Kennametal’s J&L Unit for $349 Million

Kennametal will recognize an estimated $228.6 million pre-tax gain in the
quarter ending June 30, 2006, including transaction-related expenses, resulting
in an earnings-per-share impact of about $3.25. The company expects to redeploy
this capital in the next 12-24 months with strategic initiatives. Kennametal
immediately plans to accelerate its manufacturing rationalization opportunities.
This investment is expected to have a cost impact of approximately $0.55 to
$0.70 per share and a payback of less than three years.


MSC Industrial Direct is a
distributor of MRO supplies to industrial customers throughout the U.S. MSC
distributes more than 500,000 industrial products from about 2,100 suppliers to
roughly 342,000 customers. The company had $1.1 billion in sales in fiscal year
2005.


Kennametal Inc. is a global
supplier of tooling, engineered components and advanced materials consumed in
production processes. Customers buy more than $2.3 billion annually of
Kennametal products and services delivered by 14,000 employees in over 60
countries with almost half of these revenues coming from outside the
U.S.


Related
Links:
href=”/pub/1_1/breaking-news/2951-1.html” target=_blank>MSC Earnings Up in
1Q 2006

MSC Tops
$1B in Annual Sales

href=”/pub/1_1/breaking-news/2590-1.html” target=_blank>Ferguson to Buy
Kennametal’s Integrated Supply Unit

href=”/issues/34_16/features/2295-1.html” target=_blank>Catalog Case Study:
J& L Industrial Supply Co.

increasing its force in a “very competitive” and fragmented
market. Beyond that, Cuthbertson noted, MSC is gaining a stronger presence in
the backyard of its primary national catalog competitors. W.W. Grainger Inc. and
McMaster Carr Supply Company both have headquarters in Chicago.


“(The acquisition) is certainly
going to give MSC a much stronger presence in the Midwest,” Cuthbertson says.
Machinery Tooling and Supply’s coverage includes Chicago, its western suburbs,
Northern Illinois and the state of Wisconsin.


With the purchase, MSC also gains a
foothold in the UK. About 10 percent of J& L’s sales are generated in the UK.
Sandler said MSC will eventually look to add onto J& L’s operations there and
throughout Europe. “We now have a cost-effective leg to produce growth over
time,” Sandler said.


J& L
History

Kennametal purchased J& L Industrial
Supply, a mail-order company, in 1989 and also purchased Garrett Industrial
Supply, Los Angeles, CA, that same year. Combined sales of the Garrett and
J& L subsidiaries when acquired in 1989 were about $115 million. Kennametal
continued to acquire distribution companies through the 1990s as part of a
long-range strategy for developing a larger U.S. distribution chain.


That included L.R. Christiansen
Co., Moline, IL, with revenues of $8 million at the time of its acquisition in
1991. But by 1993 Kennametal consolidated its distribution branches and cut back
to a core group of product lines in abrasives, cutting tools, tooling and
measuring devices focused on mid-sized production accounts.


Kennametal also entered national
agreements with several vendors in the early 1990s to offer customers a single
source for a broader selection of products. That included partnerships with
Norton Company, Regal-Beloit, Precision Twist Drill, The L.S. Starrett Company
and Carr Lane Manufacturing Company.


Kennametal made another strong push
at expansion in the late 1990s. It spun off its distribution businesses in 1997
with the creation of JLK Direct Distribution Inc., which it then took public,
selling roughly 20 percent of its shares in an initial public offering.


The JLK subsidiary included J& L
as well as its Full Service Supply program, which focused on integrated supply
agreements with large customers. In its fiscal year ended Jun. 30, 1999, JLK
reported net sales of $531.6 million. That included $400.3 million in J& L’s
branch and catalog sales, a 35 percent increase over the prior year, primarily
due to acquisitions, which generated $117.9 million in sales.


Its Full Service Supply business
reported external sales of $131.3 million for fiscal 1999, an increase of 1.2
percent. J& L acquired six metalworking distributors in 1998, including
Strong Tool Company, Cleveland, OH. Kennametal then took JLK private in 2000 by
repurchasing the roughly 17 percent of shares held publicly.


J& L subsequently sold the
Strong Tool operation in 2002 as part of its strategy to return to a focus on
its core competencies in catalog sales distribution. In 2005, Kennametal sold
its Full Service Supply division, with 2004 annual revenues of $138.4 million,
to Ferguson Enterprises.



Details
customary regulatory approval and negotiated conditions of closing. Goldman,
Sachs & Co. is serving as financial advisor to Kennametal in this
transaction.


The acquisition is not expected to
have a material impact on MSC’s fiscal 2006 results, and is expected to be
neutral to the company’s earnings per share through fiscal 2007, becoming
accretive toward the end of fiscal 2007.


As a part of the transaction,

MSC Industrial Direct Co., Inc.,
Melville, NY, will pay $349.5 million in cash, or 11.3X EBITDA, for Kennametal’s
J& L Industrial Supply business. The deal completes Kennametal’s planned exit
from owned distribution businesses, which had created consistent channel
management issues for the increasingly diversified cutting tool
manufacturer.


MSC Industrial Direct Co. Inc.,
Melville, NY, has announced it will pay $349.5 million in cash, or 11.3X EBITDA,
for Kennametal’s J& L Industrial Supply business. J& L reported sales of
$265 million in 2005, with 74,000 customers and more than 140
salespeople.


The deal completes Kennametal’s
planned exit from owned distribution businesses, which had created consistent
channel management issues for the increasingly diversified cutting tool
manufacturer. We’re not competing with our own distributors anymore; that is
good for us,” Kennametal spokeswoman Joy Chandler told MDM.


The transaction is expected to be
completed in the second quarter of 2006.


Access to Kennametal
Brand

For MSC, J& L offers a well-established
specialty metalworking customer segment built through strong Kennametal
technical support channels; metalworking also has been a traditionally strong
segment for MSC, but it has effectively diversified its product offerings and
markets in recent years.


“MSC will gain access to the
exclusive relationship at the national level with Kennametal brand carbide
cutting tools. …We will feature Kennametal in our catalogs and brochures as a
lead brand,” CEO and President David Sandler said in an MSC conference call. “We
expect to add significant new business from the Kennametal brand, as we will
sell it across the entire country.”


Kennametal’s Chandler said that MSC
will be able to distribute Kennametal and Hertel lines of carbide cutting tools
in the U.S. and UK, pursuant to a five-year renewable distribution agreement.
Kennametal will maintain a network of local and regional distributors. The
relationship with MSC expands Kennametal’s coverage in that MSC has the
capabilities to serve areas not currently being serviced by other distributors,
she said.


“MSC is a great match and will be
able to fully leverage J& L’s capabilities. In turn, J& L will remain a
major distributor of Kennametal products and an important strategic channel
partner,” said Kennametal CEO and President Carlos M. Cardoso. “MSC will have
access to the Kennametal portfolio of brands, and the Kennametal brand will be
marketed through MSC and J& L as the premier brand of indexable cutting tool
products.”


“All suppliers enjoy the rewards
from that increased market share,” Sandler said in response to a question
regarding the effect the relationship with Kennametal will have on MSC’s other
supplier relationships.


Kennametal said the J& L
divestiture will allow it to grow existing distributor relationships and build
new ones. Chandler said Kennametal is still on track to double the number of its
independent distributors. The divestiture of J& L also presents an
opportunity for Kennametal to improve customer options by delivering its full
range of products to customers through the strongest distribution partners,
according to the company.


Expanded Geographic
Reach

The acquisition expands MSC’s geographic
reach in the central U.S., which Sandler said was the most concentrated region
for metalworking products in the U.S. J& L has two distribution centers: one
in Detroit and the other in Chicago.


Bob Cuthbertson, president of
Machinery Tooling and Supply, a strong Sandvik Coromant distributor in Chicago,
IL, says MSC is

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