The old adage, “May you live in interesting times,” certainly described the electrical market during the past year. The editors of EM and EW had plenty of news stories to cover in 2006. Here are our picks for the most important news and trends of the past year.
Distributor acquisitions hit record pace.
This year may go down as the most active ever for distributor acquisitions, both by number and in terms of the combined sales volume of the acquired companies. The editors of Electrical Wholesaling and Electrical Marketing newsletter have compiled a list of more than 30 distributors of electrical supplies that were acquired in 2006. That total is notably higher than other active acquisition years such as the late 1990s, when these publications reported on up to 20 deals. When the U.S economy is sound, construction is booming, private-equity funding is plentiful and potential suitors are scrambling to build new regional or national distribution platforms, it’s a “perfect storm” for business owners, because they can often demand a premium for their businesses.
The last time these factors came into alignment was probably during the acquisition craze of the 1990s, but the electrical industry didn’t see deals of this size back then. The sheer size of the consummated 2006 deals is staggering. Home Depot Supply, Atlanta; Rexel Inc., Dallas; Sonepar USA, Philadelphia; WESCO Distribution Inc., Pittsburgh; and U.S. Electrical Services Inc. (USESI), Exton, Pa.; all acquired sizable electrical distributors ranked on EW’s most recent Top 200. These five distributors bought 10 Top 200 distributors. The companies they acquired had a combined 2005 sales volume of more than $5 billion. That’s “billion” with a “B”!
What will the acquisition climate be like in 2007? Assuming the economy and construction markets perform as expected and private-equity funding remains plentiful, look for another banner year in distributor acquisitions. Acquisitions remain a key element of the growth strategies for the largest acquirers, and Home Depot Supply’s move into the distribution world this year has upped the ante on the pricing of the deals.
Don’t be surprised if another new player from outside the electrical business makes headlines with a big acquisition in 2007. Speculation continues that Wolseley plc, Reading, England, the world’s largest distributor in the commercial/residential/industrial space, would love to add to its plumbing and building supply distribution businesses in North America with the acquisitions of large electrical distributors. Wolseley had $21.5 billion in 2005 sales and 70,000 people working in more than 4,200 branches in 14 countries. Its building products distributor, Stock Building Supply, Raleigh, N.C., had $4.1 billion in 2005 revenue, and 307 locations in 33 states. In the plumbing market, Ferguson Enterprises, Newport News, Va., had $7.1 billion in 2005 revenue and 1,100 branches in North America. Wolseley bought several distributors in the plumbing and building markets this year and its 10 2006 North American acquisitions are expected to add approximately $765 million to Wolseley’s global sales.
There’s also always the chance a new distribution entity will enter the market with the strategy of selling lower-cost products from electrical manufacturers based in the Pacific Rim and other regions where low-cost manufacturing prevails.
Private-equity firms court distributors of all stripes.
Directly related to this acquisition news is the continuing interest in the distribution world among major private-equity firms that back so many of the deals. In the electrical market, USESI is backed in large part by MSD Capital, the New York-based family office of Michael and Susan Dell of Dell Computer fame, and by Kelso, a 30-year-old private-equity company based in New York. Rexel is owned by a consortium of global private-equity giants, Clayton, Dubilier & Rice Inc. (CD&R), French investment firm Eurazeo, and Merrill Lynch Global Private Equity. At year-end, speculation raged that after a big year building out its Home Depot Supply distribution platform, Home Depot itself might be acquired for approximately $100 billion by two private-equity firms, Kohlberg Kravis Roberts & Co. (KKR) and Texas Pacific Group.
While the electrical wholesaling industry now seems to be attracting more private equity than most other distribution businesses in nearby market segments, it’s far from the only distribution market attracting interest. In fact, according to a study by Brown, Gibbons, Lang and Co., a Cleveland-based private-equity firm, in 2005 acquirers bought more than $45 billion in distribution revenues through acquisition. According to Adam Fein, president, Pembroke Consulting, Philadelphia, in 2006 financial buyers such as private-equity funds were looking to invest approximately $100 billion of uninvested capital in the wholesale distribution market — that’s at least $400 billion in buying power at current leverage multiples.
The interest of private-equity funds in the distribution industry waxes and wanes. When interet rates are comparatively low and money is accessible, they storm into the market. They see many of the distribution market’s niche industries as fragmented and are more than ready to fund the consolidation. But when the market sours, interest rates increase and funding becomes more expensive, they head for the door.
Record copper prices pound the electrical market (again).
Is anyone ready to predict where copper prices are headed in 2007? It’s a dangerous game best left to the experts. In November 2006, copper prices averaged $3.26 per pound, according to Metals Week. That’s up more than one dollar per pound from last year at this time and up $1.77 per pound from December 2004. These prices are astronomically high in a market that historically fluctuates in the 80 cents per pound to $1.20 per pound range.
John Mothersole, principal of industry practices, Global Insight, Waltham, Mass., follows the fluctuations in building materials costs closer than anyone. He says over the past year he has gotten more questions about the cost of copper than any other building material. At the 2007 McGraw-Hill Construction Forecast, held in Washington, D.C., in late October, he said the fundamentals of supply and demand are stabilizing in the copper market. While he wouldn’t rule out more increases for this pricey metal in 2007, he does expect any increase to be less dramatic than those we’ve seen in the last two years.
Home Depot Supply buys into electrical industry.
While Rexel purchased more electrical sales than Home Depot Supply in 2006, and Sonepar and USESI finalized more acquisitions this year, Big Orange made the biggest splash. When the company bought Hughes Supply Inc., Orlando, and Edson Electric Supply, the announcements hit the electrical wholesaling industry like an $81 billion dollar cannonball in a backyard pool party. With a parent company ringing up that kind of sales and Home Depot Supply’s own aspirations to be a $23 billion to $28 billion player in the distribution market by 2010, we haven’t heard the last of the Home Depot Supply name in this market.
Global sourcing of electrical products takes center stage.
The next big storm to hit the electrical market will be an all-industry debate over the branding of products (See “Your Brand Versus My Brand,” EW, October 2006, page 3). While manufacturers have sourced products from low-cost global manufacturing locations for more than 20 years, the debate over the labeling of these products is just starting to take form. While manufacturers used to be the only ones playing the global sourcing game, distributors and reps are now inking global manufacturing deals and labeling these products with their own brand names. It’s a trend that challenges the brands of traditional electrical manufacturers.
Love or hate the idea, it won’t be the first time a global importer uses this approach. To protect their brands, traditional manufacturers will have to do more to differentiate their packages of products and services from new competitors.
To be continued in the Dec. 22 issue of Electrical Marketing.