2002: More Than a Bad Business Year

Dec. 6, 2002
Remember 2002? It's a year many of us would rather forget, with business down so much. Market forecasters are already cautioning electrical companies

Remember 2002? It's a year many of us would rather forget, with business down so much. Market forecasters are already cautioning electrical companies that they will have to wait until 2004 for the much-awaited return to prosperity. Despite the soft economy, plenty was still cooking in the electrical industry during 2002. The following news and industry trends that took place in 2002 will shape the electrical wholesaling industry for years to come.

It's a small world after all. European distributors and electrical manufacturers again dominated electrical news in 2002 as Europe's “Big Three” distributors — Rexel, Sonepar and Hagemeyer — continued building and refining their distribution networks in North America.

Sonepar USA, Berwyn, Pa., acquired Eoff Electric Co., Salem, Ore., in its first venture into the Pacific Northwest. Industry veteran Jack Mumford, president of Sonepar West, says the Eoff acquisition gives the company a base from which to replicate its growth on the East Coast. Sonepar also made an acquisition in New Jersey to bolster its already solid presence in the mid-Atlantic states, when Cooper Electric/Sonepar bought Fromm Electric Supply of Piscataway, Piscataway, N.J.

Compared to the past few years, things were relatively quiet on the acquisition front for Hagemeyer North America, Atlanta; Rexel Inc., Dallas; and Sonepar. However, all three companies are investing heavily in regional distribution centers (RDC) in the United States. Sonepar has a 100,000-square-foot RDC at its Cooper Electric facility in Linden, N.J., and a mammoth 178,000-square-foot RDC at a Northeast/Eagle Electric facility in the Boston area. Rexel operates what it calls “DC Lites” in Orlando, Fla.; Houston; Dallas; Cleveland; and St. Louis. The company plans to convert its facilities in Atlanta; Tampa; and possibly Southern California to RDCs in the near future.

Many U.S. electrical distributors don't realize just how attractive a market the United States is to these European distributors. To Hagemeyer, Rexel and Sonepar, the U.S. market is a fragmented business that's ripe for acquisitions. Despite the current economy, the United States offers more sales opportunities than any other market in the world. In Europe, electrical manufacturers sell a large percentage of their products directly to end users because of the continent's quick-and-easy logistics. Plus, most of its biggest electrical markets are already saturated with distribution.

Another acquisition reportedly underway would change the face of the Texas electrical distribution market. Warren Electric Group, Houston, which filed for bankruptcy protection in October, has already sold eight of its locations to fellow Rockwell Automation/Allen-Bradley distributor, The Reynolds Co., Dallas. Warren Electric had negotiated a deal with Elliott Electric Supply, Nacogdoches, Texas, to purchase the rest of its operations, but Allen-Bradley nixed the deal because Elliott Electric had not previously been one of its distributors. At press time, Warren Electric was evaluating other acquisition bids. Interestingly, several years ago, Warren Electric bought Watson Electric Supply, merging the two largest Allen-Bradley distributors in Texas.

The coveted Allen-Bradley franchise is a common threading tying together many acquisitions of industrial distributors. Allen-Bradley has perhaps the most selective of all distribution policies, and the company only has several hundred distributors, as compared to the more open distribution policies of many of its competitors. Some industry observers believe Allen-Bradley may one day need less than 100 large and powerful distributors to cover the entire North American market.

Earlier this year, Allen-Bradley's largest distributor, McNaughton-McKay Electric Co., Madison Heights, Mich., purchased Kiemle-Hankins Co., Toledo, Ohio, which also has that franchise. Other Allen-Bradley distributors that McNaughton-McKay has purchased in recent years include Emcorp, Columbus, Ohio; Findlay Electric Supply Inc., Findlay, Ohio; Tab Electric Supply, New Bern, N.C.; and Advance Electric Supply Co., Flint, Mich. Another large Allen-Bradley distributor, Turtle and Hughes Inc., Linden, N.J., also acquired another Allen-Bradley distributor, Franklin and Smith Inc., West Paterson, N.J.

For the other acquisitions of distributors, check out the sidebar on this page.

Manufacturers' M&A activity was still strong in an off business year. The past year may best be remembered in the electrical manufacturing community for double-digit declines in sales, the lavish expenditures of Tyco's rogue CEO, Dennis Kozlowski, and a bevy of mergers and acquisitions.

Hubbell Inc., Orange, Conn., was probably the most active acquirer this year, with its purchase of Iselin, N.J.-based U.S Industries Inc.'s USI Lighting division for $250 million; Hawke International, a British hazardous-locations equipment manufacturer; and the pole-line hardware business of Cooper Industries, Houston.

The USI Lighting acquisition — Hubbell's biggest deal ever and the largest acquisition in the lighting industry in 2002 — included well-known lighting brands such as Progress, Kim Lighting, Architectural Area Lighting, Columbia, Dual-Lite, Moldcast, Prescolite and Spaulding. The acquisition of these brands gives Hubbell Lighting a commanding presence in the residential lighting market (with Progress Lighting), and also fills out its commercial and industrial product offerings.

In the purchase of Cooper Industries' pole-line hardware business for $8.7 million, the Cooper business unit's inventory, tools, and dies will be moved to the Hubbell Power Systems' location in Centralia, Mo., and that product line will be blended with the company's A.B. Chance offering. With Hawke's specialization in brass cable glands and cable connectors used in the oil-drilling industry, Hubbell will add to its existing focus in the petrochemical business.

What would have been the largest merger in 2002 seems to have dissolved. In late November, the European Commission vetoed Schneider's proposed billion-dollar acquisition of Legrand SA, Limoges, France, which it originally announced last year. Soon after the European Commission voiced its concerns, Schneider announced it would sell its 98.1 percent stake in Legrand by implementing the sale contract that it signed in July with the KKR-Wendel Investissement consortium. (See related story on page 1 of this issue for more details.)

Another European giant with a solid presence in the United States sold several business units in 2002. In January, Raleigh, N.C.-based Siemens Power Transmission and Distribution business unit, a subsidiary of Germany's Siemens AG, sold its large-scale power quality products to Chicago's S&C Electric Co.

Rockwell Automation/Allen-Bradley, Milwaukee, Wis., a competitor of Siemens and Groupe Schneider, was also in the news with two acquisitions in the industrial automation market. The company bought Propack Data GmbH, a German software developer in the manufacturing information systems area, and Samsung Electronic Co.'s Mechatronics business located near Seoul, South Korea. The Propack acquisition will offer the company additional expertise in software for the pharmaceutical manufacturing industry, while the Samsung deal adds to the Rockwell line of drives, motion-control products, programmable logic controllers (PLCs) and other industrial-automation products.

The electrically-oriented divisions of GE Co., Fairfield, Conn., were also actively acquiring other companies in 2002. GE Fanuc bought industrial software manufacturer Intellution from Emerson Electric. GE Industrial Systems purchased Euro-Diesel, a UPS manufacturer based in Belgium, and NovaSensor, a manufacturer of high-tech products for the industrial market. GE also announced it was merging its GE Lighting and GE Consumer Products divisions into one business unit.

In other acquisitions, Hunt Power L.P., Dallas, bought E-MON Corp., Langhorne, Pa., to bolster its position in submetering business; LTV Corp. sold its LTV Steel Tubular Products division to Maverick Tube Corp., St. Louis; Juno Lighting, Des Plaines, Ill., bought Alfa Lighting, San Francisco, and Genlyte Thomas Group, Louisville, acquired Vari-Lite, Dallas.

In the test and instrument market, Fluke Corp., Everett, Wash., purchased Reliable Power Meters (RPM), Los Gatos, Calif., a maker of three-phase power meters for the power quality market, and nontouch thermometer manufacturer Raytek Corp., Santa Cruz, Calif.

Other acquisitions included the purchase by Honeywell Automation and Control, Morristown, N.J., of Invensys Sensor Systems, Shelby, N.C., for $415 million; the acquisition by European manufacturer Fandstan Electric Ltd. of the mobile electrification business of the Dutch operations of Woodhead Industries Inc., Deerfield, Ill., for $4.9 million; and the acquisition by Toms River, N.J.-based Heyco Products Inc., of Kaf-flex Inc., Tampa, a manufacturer of flexible, nonmetallic PVC conduit, tubing and hose products.

Mergers reshape distribution software business, too. The distribution-software arena has both matured with and been shaped by the times. Not unlike the electrical manufacturing community, some key software providers have sold their operations to larger entities to gain access to new capital. Prophet 21 Inc. recently announced plans to merge with two investment bankers, Thoma Cressey Equity Partners Inc. and LLR Partners Inc. The Yardley, Pa.-based software vendor agreed to the merger so it could leverage its brand equity, technology and market penetration in return for the financial backing and business expertise of the new partners.

Eclipse, Shelton, Conn., also sought the backing of a larger entity with its sale to Intuit Inc., the developer of Quicken personal finance software. The Mountain View, Calif.-based Intuit will run Eclipse as a separate business unit led by Michael London, Eclipse's founder, president and CEO.

In a smaller acquisition, NxTrend Technology Inc., Colorado Springs, Colo., bought Corp DNA, a Columbus, Ohio, provider of customer relationship management (CRM) software.

The quest for reliable data reigns supreme in the electrical market. The two largest providers of digitized product information for the electrical industry spent much of the year forging partnerships with new subscribers and business partners. IDEA, Rosslyn, Va., which operates the Industry Data Warehouse (IDW) for the National Association of Electrical Distributors (NAED), St. Louis, and the National Electrical Manufacturers Association (NEMA), Rosslyn, Va., slowly but steadily built its subscriber base in 2002.

IDEA got a major endorsement at the NAED Annual from Graybar Electric Co. CEO Robert Reynolds, who urged all of Graybar's manufacturing partners to get on board with IDW. Later in the year, several of the largest electrical distributors and NAED jointly issued a letter calling for broader support of the IDW.

I2/Trade Service, Dallas, also announced a business alliance with Prelude Business Systems, Addison, Texas, where it will integrate its content delivery and e-commerce enabling solutions with Prelude's various automation and Web-enabling systems. I2 also provides manufacturer product and pricing information to the IDW for vendors not yet sending data directly to the IDW themselves.

Contractor consolidators get consolidated.

The electrical wholesaling industry has been consolidating at a steady pace for the last 30 years. In contrast, until a few years ago the electrical contracting business was almost totally fragmented, with over 60,000 small, mostly family-owned firms doing the vast majority of the business.

In the late 1990s, several consolidators came on the electrical contracting scene with dreams of buying dozens of smaller contractors to build publicly owned national electrical contracting companies. During the past year, at least two of the consolidators have fallen on hard financial times.

Encompass Services Corp., Houston, which acquired dozens of electrical contractors in the late 1990s, filed Chapter 11 last month, but recently announced that it has secured $60 million in debtor-in-possession (DIP) financing from a syndicate of financial institutions including Bank of America, JP Morgan Chase Bank and General Electric Capital Corp. and additional bonding capacity for to use during its reorganization process. (See related story on page 1).

Bracknell Corp., Minneapolis, was a high flyer that bet on the telecommunications market. But when that market crashed, so did Bracknell's stock price. Although the company logged over $630 million in 2001 revenues in 2001, its stock price plummeted from $52.50 to 12 cents late last year on NASDAQ. It was delisted late last year, and this year the Ontario Securities Commission issued a cease trading order.