An article in this month’s issue of Electrical Wholesaling picks the most interesting electrical news of 2005. In the first of two articles, EM takes a look at the companies, trends and people that made news during the past year.
Record material price increases pound industry again. Few people thought the price increases the construction market saw in 2004 would be duplicated in the near future. Wrong. Although pricing for core construction elements such as gypsum, cement and lumber simmered down after 2004’s wild ride, the price of copper has once again astounded the experts. Just when wire and cable industry veterans said the price of copper wouldn’t climb any higher, this fickle metal proved them wrong. At press time, the price for copper was a record $1.94 per pound. Metal market analysts believe China’s apparently insatiable appetite for copper, speculation and production lulls are responsible for the record prices. At least one analyst expects copper prices to drop significantly in 2006, as new mining capacity comes on line. A Financial Times report said HSBC analyst Alan Williamson sees a 14-percent decline in copper prices in 2006, followed by another 14-percent decline in 2007.
The record price increases in copper probably didn’t draw as much attention in 2005 because of the situation in the PVC market, where the cost of oil-based elements used in the PVC manufacturing process went off the charts after Hurricane Katrina shut down several key manufacturing plants. These days, distributors, manufacturers and reps wonder if they can get any PVC pipe, not when. And when PVC pipe is available, it’s at a hefty price increase. Michele Halickman, an economist who tracks construction material pricing for Global Insight, Washington, D.C., said PVC prices are up 18 percent year-to-date in 2005, and will increase another 16 percent in 2006 before starting to descend in fourth-quarter 2006.
Home Depot paints more markets orange. With $72 billion in annual sales, almost 2,000 stores in the United States, Canada and Mexico, and miles of aisles packed with electrical products, Home Depot, Atlanta, has always been the 500-pound orange gorilla that can’t be ignored by the electrical distributors who compete against the company, and the manufacturers who want to figure out a way to sell to the company without infuriating too many of their distributors.
Home Depot elbowed its way back into electrical market news in late 2005 because of rumors that it wants to buy Hughes Supply Inc., Orlando, Fla. While the acquisition of an electrical distributor the size of Hughes (ranked as the 8th largest electrical distributor on EW’s Top 200 listing, with $925.4 million in electrical sales) would certainly shake up the electrical business, it’s just the next step in market expansion for Home Depot.
Because Home Depot will eventually run out of key markets in which to build new retail stores, over the past few years the company has turned its attention to the business-to-business market by serving professional customers through its Home Depot Supply division. It has built this business through strategic acquisitions in a broad front of markets, including lighting, plumbing and construction materials. Its 2005 acquisition of Montreal-based Litemore, Canada’s largest lighting distributor, gave the company additional clout in the lighting market north of the border. Home Depot made a similar acquisition in July 2005 with its purchase of National Waterworks Holdings Inc., the nation’s leading distributor of products used to build, repair and maintain water and wastewater transmission systems. National Waterworks, Waco, Texas, has $1.5 billion in 2004 sales and 130 branches in 36 states. In 2005, Home Depot also acquired the 17-location Williams Brother Lumber Co., Suwanee, Ga.
Don’t forget Home Depot’s existing distribution businesses that focus on the construction trade. At the end of the third quarter, tool and hardware specialist White Cap Construction Supplies Inc., Santa Ana, Calif., which Home Depot acquired in 2004, had 94 branches in 23 states, and is on a major acquisition binge of its own.
Another example of Home Depot’s expansion beyond the retail market is its Builders Solution Group, the installation business it built through acquisitions of specialty contractors in flooring, roofing, gutters and counter tops. This division grew 21 percent to $1.2 billion during the third quarter.
Hughes Supply makes headlines as an acquisition candidate and as an acquirer. One of the reasons Home Depot reportedly has interest in Hughes Supply is its aggressive acquisition campaign over the past two years in the maintenance, plumbing and utility markets. In 2005, Hughes Supply purchased TVESCO Inc., Memphis, Tenn., a well-known utility specialist that ranked as the 38th largest distributor of electrical supplies on EW’s Top 200; Ram Pipe and Supply Inc., a distributor of plumbing, water and sewer products in Yuma, Ariz.; and National Construction Products Inc., an Atlanta-based distributor of construction materials. These deals followed the company’s 2004 acquisitions: Century Maintenance Supply Inc., Stafford, Texas, a MRO specialist; Standard Wholesale Supply Co., Las Vegas, a distributor of waterworks, plumbing and electrical products; Todd Pipe and Supply, Hawthorne, Calif., a Southern California plumbing distributor; and two utility specialists, Southwest Power, Sante Fe Springs, Calif., and Western States Electric, Portland, Ore.
Industry observers believe the Century Maintenance Supply acquisition would fit nicely with Home Depot’s Maintenance Warehouse business, now under the Home Depot Supply banner. It’s interesting to note that electrical sales only account for approximately 10 percent of Hughes Supply’s $4.42 billion in 2005 sales. That’s roughly comparable to the company’s utility sales, but less than half of its plumbing and HVAC sales, which account for 24 percent of annual sales.
The industry is in the thick of hurricane recovery efforts. Electrical distributors, manufacturers and reps are busy supplying products to restore electrical systems on the Gulf Coast and with their volunteer and charitable efforts. Although it’s tough to put a dollar amount on the donations by electrical companies, the charity exhibited by dozens of companies is truly inspiring, and makes one realize that we really do work in an electrical community that in times of need watches out for its own. For an updated list of the many acts of charity by companies in the electrical business, check out www.ewweb.com.
Even though Hurricanes Katrina and Rita are starting to fade from the headlines and public consciousness, the electrical industry presses on. It’s part of the industry’s DNA to be in the game deep and early in any rebuilding process.
Private equity firms target the electrical market. Judging from the number of calls Electrical Wholesaling’s editors field from private equity firms researching the electrical business, or searching for executives to lead their charge into this industry, private-equity funds flush with cash are watching not only the electrical wholesaling business but also distributors of many different stripes in the wholesale-distribution industry with more than casual interest.
It’s just a matter of time before one swoops into the electrical business and makes a big acquisition. As an industry, the wholesale-distribution channel accounts for 7 percent of the United States’ private gross domestic product and employs one in 20 U.S. workers, according to Adam Fein, president, Pembroke Consulting, Philadelphia. Although the profit margins in the distribution business probably won’t excite Wall Street investment bankers used to high-profile deals in the consumer or retail markets, it’s still somewhat surprising that more private equity firms haven’t taken as much interest in this business.
An early deal in this industry by a private equity firm was the 1994 acquisition by Clayton Dubilier and Rice Inc. (CDR), New York, of WESCO from Westinghouse Electric Corp., Pittsburgh, Pa. Last year Rexel SA, the largest electrical distributor on the planet, was purchased by a consortium of international investment bankers, including CDR.
But this time around, the amount of money flowing that private equity firms have to spend on acquisitions is enormous. A recent New York Times article said these companies now have a combined total of $2 trillion in purchasing power. The article said this war chest was pumped up in part by $491 million that large institutional investors such as pension funds have poured into private equity funds looking for better returns than what they can get in the stock market. The investment funds would want to make a tidy profit on any of their purchases in the electrical market, either by taking it public or reselling it. If private-equity acquisitions become more popular in the electrical business, when distributorships are put back on the selling block by their investors looking to cash in on their investments, it could really change the industry as we know it.