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While Wall Street often overlooks slow-but-steady markets such as the wholesale-distribution industry in favor of investment opportunities in high-profile consumer segments like retail stores, banking and consumer electronics, distributor acquisitions were front-and-center at the 3rd Annual Cross-Border Conference, held May 8-9 in Boston.
Hosted by Brown Gibbons Lang & Co., Cleveland, Ohio, the conference gave private-equity fund managers from around the globe insight into the inner works of the mergers and acquisitions in the wholesale-distribution market in the panel discussion, "Global Wholesale Distribution: Consolidating at an Accelerating Pace."
Sitting on the panel were key players in mergers and acquisitions over the past few years: Peter Gotsch, partner, Code Hennessy & Simmons; Thomas Ireland, operating partner, Clayton Dubilier & Rice; James McGibbon, director of strategic business development for The Home Depot; Lawrence Stoddard, senior vice president of business development, Wolseley USA; and Richard Worthy, chairman and CEO, US Electrical Services.
James Miller, managing director and principal of Brown Gibbons Lang & Co., said as a group the panelists had reviewed hundreds of acquisitions in the wholesale-distribution business and invested in dozens of distributors. The panelists agreed billions of dollars in private-equity capital has flowed into the wholesale-distribution business in the past 18 months and that many deals are in the works. Family-run supply houses can be popular acquisition targets if they offer a solid regional footprint, have no MIS issues weighing them down and are run by good managers who can continue to grow the business in their local markets.
"If you have bad management and bad systems, you obviously have a bad company," said Peter Gotsch of Code Hennessy & Simmons.
Worthy of US Electrical Services agreed that good management was the most attractive element in a prospective acquisition target and added that he is looking for companies that can dominate regional markets.
Home Depot’s acquisition of Hughes Supply, Orlando, Fla., was a big topic of discussion at the panel, and panelists enjoyed teasing Home Depot’s James McGibbon about the high earning multiple the company paid for Hughes Supply. But the panelists say while they expect Home Depot to be a tough competitor, the company’s entry into the market is actually a good thing because it forces other distributors to manage their businesses more effectively and proves the wholesale-distribution world offers some solid investment opportunities.
Private labeling will become a bigger factor, according to the panelists. McGibbon of Home Depot said it could be a "huge advantage" for distributors and Stoddard of Ferguson Enterprises/Wolseley said many large distributors will move to private labeling. Richard Worthy said as a new company US Electrical Services doesn’t have the critical mass to make private labeling a fact of life, but he agreed that it’s here to stay.
"Distributors used to be logistics companies, but now they have to see themselves as marketing companies," he said. "Customers will define the distributor’s role."