Robust M&A activity continues
by Curt Tatham
As expected, 2011 saw a very healthy level of M&A activity both broadly as well as
specifically within the industrial distribution sector. The current environment is very likely to continue to foster another busy year of M&A activity in 2012. The ongoing strength in M&A continues to be driven by several factors including:
- Within the financial sponsor universe, nearly $500 billion of available capital and funds is beginning to expire
- Lending markets remain attractive but cautious with greater financing availability for larger companies ($10+ million EBITDA)
- Strategic acquirers have been very active in the market since early 2010 as they need acquisitions to supplement organic growth and expand EPS
- Strategic acquirers retain significant cash ($1.9+ trillion) to deploy, debt remains available and they enjoy higher trading multiples
- Financial performance at targets generally remains quite strong with favorable year-over-year comparisons facilitating a smoother due diligence process
- The manufacturing sector continues to show strength and leads the economic recovery, making industrial distribution targets attractive
- Consolidation continues as acquirers seek to add scale, expand product breadth, expand value-added services offerings, expand geography and realize potential cost synergies resulting from elimination of redundancies
2011 included numerous notable transactions, many of which are noted below.
- AEA Investors acquired Singer Equities, a distributor of industrial rubber products, from LLR Partners
- Kaman acquired Catching Fluid Power Inc., a distributor of fluid power products
- WESCO agreed to acquire RS Electronics, a distributor of electronic and electrical products serving primarily the industrial, medical equipment, automotive and contract manufacturing end markets
- DXP Enterprises agreed to acquire C.W. Rod Tool Company, Houston, a distributor of cutting tools, abrasives, coolants and machine shop supplies
- BlackHawk Industrial Distribution (majority-owned by Brazos Private Equity Partners) continued to implement an active buy-and-build strategy in the industrial distribution market by completing four acquisitions in 2011 (Tool Service Corp., Tool Fabrication Corp. and Fluid Services Corp., Sanders Tool Supply, Fuchs Machinery and Rogers Industrial Supply)
- Advent International acquired a majority stake in Morrison Supply Company, Fort Worth, Texas, a distributor of plumbing and HVAC supplies. Chip Hornsby, an Advent operating partner and former CEO of Wolseley, will join Morrison as CEO.
- ERIKS NV, a Netherlands-based industrial company, acquired industrial rubber products distributor Lewis-Goetz from The Audax Group
- ERIKS NV acquired Industrial Controls, a full-service distributor of controls and solutions for commercial HVAC, process control and industrial automation applications from AEA Investors
- Sonepar USA acquired OneSource Distributors, a distributor of electrical materials and components, industrial automation, lighting, switchgear requirements, manufacturing and subassembly, as well as utility products and services
- Littlejohn & Co acquired SunSource Holdings Inc. from CHS Capital. SunSource is a fluid power distributor that serves customers in the oil and gas, infrastructure, transportation equipment, construction, crane and hoist, agricultural equipment, mining, metals processing, food and beverage, forestry and alternative energy industries.
- Hajoca acquired HD Supply's HVAC/Plumbing business
- Greenbriar Equity Group acquired Anixter's Aerospace Hardware Division
- W.W. Grainger acquired Fabory Group, a European distributor of fasteners and related MRO products
- CI Capital Partners acquired a controlling interest in Tech Air, Danbury, Conn., a distributor of industrial, specialty and medical gases
- Greenbriar Equity Group acquired Ryan Herco Flow Solutions, a national distributor of corrosion-resistant fluid handling, filtration and flow control products
As we look ahead to 2012's M&A prospects, economic fundamentals are encouraging. U.S. manufacturing grew at its fastest pace in six months in December and producers appear to be boosting output to replenish de-stocked inventory in coming months. The Institute for Supply Management's closely watched index of factory activity rose to 53.9 last month, up from 52.7 in November and its best showing since June (readings over 50 indicate expansion on the 100-point scale). Meanwhile, a measure of December new orders jumped to its highest level since April, while 25% of respondents said their inventories were "too low" in December, compared with 19% the month before. Lastly, stronger demand is finally translating into jobs. Within the report from the Institute for Supply Management, a measure for hiring jumped to 55.1 in December, up from 51.8 in November. That tracks with other recent gains in the broader jobs market.
To be sure, there are still large global issues that could lead to a dislocation in global debt and equity markets including Europe's sovereign debt situation, as well as the uncertainty a U.S. election year always brings with it. However, the current positive fundamental economic environment, coupled with the positive M&A market dynamics discussed previously, should be supportive of another active year of M&A activity within the industrial distribution sector.
Curt Tatham, Managing Director at Lincoln International, leads the firm's Distribution Group. Reach him at (312) 580-8329 or ctatham@lincolninternational.com.
This article originally appeared in the Jan./Feb. 2012 issue of Industrial Supply magazine. Copyright 2012, Direct Business Media.
INDUSTRIAL SUPPLY MAGAZINE
The November/December issue of Industrial Supply magazine features an in-depth cover story about Kimball Midwest. Plus, we're featuring articles by contributing writers Dirk Beveridge, Frank Hurtte, and Mike Marks, as well as interviews with numerous product and distribution industry experts.
