Is M&A Peaking?
Modern Distribution Management just held a great audioconference on M&A trends in wholesale distribution. Read the provocatively titled summary Is the Market Too Hot?. (You can order a transcript and CD from MDM here.)
As I document in Chapter Five of my new Facing the Forces of Change®: Lead the Way in the Supply Chain wholesale distribution trend report, announced acquisitions have more than quadrupled in the past 2 years for wholesaler-distributors in construction, and industrial and commercial markets. (See Exhibit 5-1 on page 92).
In light of these trends, wholesale distribution executives should have a strategic plan for their business that recognizes the reality of acquisition activity, yet maintains a focus on profitable growth.
ARE WE PEAKING?
Wholesale distribution remains one of the top targets for buyout investments by private equity firms. These financial buyers are displaying a far greater ability and willingness to pay premium prices for leading distribution companies. They are being attracted by the ongoing need for wholesale distribution to end markets insulated from global competition, such as facilities maintenance, construction, or health care services.
The recent sales of HD Supply to a trio of private equity firms (Bain Capital, Carlyle Group, and Clayton, Dubilier, & Rice) shows the strong appetite for wholesale distribution. (See Home Depot Agrees to Sell Supply Unit for $10 Billion.) All three firms have made multiple investments in wholesale distribution over the years, although Chapter Five only discusses CDR.
However, the MDM panelists believe that this activity may have reached a peak. Brent Grover, a fellow Fellow of the NAW Institute, made some pointed comments about the market, stating: “I think there are some pretty unattractive companies that have been dressed up and the market figures out pretty quickly that it’s not the kind of firm they want to buy.”
Jim Miller of Vetus Partners, who I consider to be today’s leading expert on M&A in wholesale distribution, sees the market “…at or near a plateau.” Strong words from a major player. (Full disclosure: I am on the Advisory Board of Jim's new venture called Supply Chain Equity Partners.)
PLANNING YOUR FUTURE
The courage to face the future honestly often leads owners to look for a profitable exit strategy or even favorable terms for a recapitalization. However, acquisition dynamics should play a role in the decision, because industries do not consolidate forever, as evidenced by the sharp slowdown in acquisition activity after the peak in 2000.
Well-run, independent distributors continue to thrive even in consolidating industries due to their great skill in maintaining high levels of customer service and generating customer loyalty. One distributor summed it up in a comment that I include on page 94 of Lead the Way in the Supply Chain:
“I think [consolidation] will increase the value of the independent distributor related to servicing the customer and providing value to the vendor. The progressive independent will have a distinct service advantage. We will be more nimble and more reactive to local market conditional changes. It will raise the bar on the independent, however.”
Well said.
3 comments:
The Atlanta-Journal Constitution, Home Depot's hometown paper, included my comments in their story of the sale of HD Supply:
Home Depot puts focus back on retail
Modern Distribution Management also quoted me in their coverage:
Home Depot to Sell HD Supply for $10.3B
Adam
Adam - great post. Is the bigger question whether or not M&A activity as a whole has peaked or is peaking? It appears that many private equity firms are just starting to get interested in the often overlooked wholesale distribution sector. In a recent MDM article they quote Jim Miller as saying that over 100 private equity groups are currently pursuing wholesale distribution acquisitions. While this could be seen as the peak for M&A within the sector I think it also reflects a growing interest in the sector. If the cost of debt remains cheap allowing overall M&A activity to continue I think this might just be the beginning for M&A within the sector. What are you thoughts on strategic M&A players in the sector such as Grainger?
My experience has been that only a small percentage of private equity firms pursue distribution businesses. They are generally looking for value-added distributors that have a reason to exist, have growth potential and generate EBITDA margins in excess of 10% and relatively low capital expenditure requirements. For some sponsors, their best performing investments have been distribution businesses.
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