By Jack Keough
The year 2012 will go down as an active one for mergers and acquisitions in electrical distribution and manufacturing but it will also be long remembered as the year of the mega-deals. And there were many with (apparently) many more to come.
What prompted this urge to merge?
One reason is that many companies were flush with cash and were looking to expand; another is that capital was readily available and there was a strong interest by equity firms to continue investing in the industrial/electrical sector. Many companies were looking to buy growth-and they succeeded.
Still others, many of them small family business owners, were eagerly looking to sell their companies before the end of the year because they would pay higher taxes if they sold their businesses in 2013.
There is no doubt that mergers and acquisitions are on the rise. This summer, for example, there were more than eight acquisitions made in the electrical sector.
This merger activity comes after some reports earlier this year described M&A activity as sluggish for the first half of 2012. That certainly hasn’t been the case in the second half.
And it doesn’t appear that any slowdown will be taking place anytime soon.
“We’re seeing a healthy market. We don’t see any reason that mergers and acquisitions slow down in 2013,” says Curt Tatham, managing director of Lincoln International, which provides advice to companies involved in mergers and acquisitions.
Tatham points out that many distributors are privately held and don’t have succession plans in place. And, in some cases, family members are not even interested in carrying on the family business.
In addition, strategic buyers are looking to smaller ones to get additional products to their already existing menu of products.
But Tatham also noted that there still is room for smaller distributors. “Consolidation is making it harder to compete but many of them have long standing relationships with customers and provide them with solutions to their problems,” he said in an interview.
An offshoot for many acquirers is that they have the opportunity to get additional management talent and employees who have unique and diverse skills.
Mergers and acquisitions require careful planning to ensure that synergies are fully developed and costs are reduced. Not all acquisitions work out. In fact, a USA Today article earlier this year pointed out that 70% of acquisitions fail to live up to expectations.
Some major deals
Let’s take a look at some of the major deals that took place in 2012 that will impact the electrical distribution channel in the years ahead.
One of the biggest deals in recent years occurred In February when Zurich, Switzerland-based ABB purchased Thomas & Betts for $3.9 billion. This deal shocked many observers of the electrical industry. That deal came on the heels of ABB purchasing Baldor Electric just two years ago. Baldor, which manufactures motors and drives, is based in Fort Smith, Arkansas.
ABB is an established presence in Europe but does not have the same presence in the North American market. In fact, prior to this deal, more than half of ABB’s sales came from Europe. The purchase gives ABB access to more than 6,000 distributors and wholesalers in North America through Thomas & Betts, which had roughly $2.3 billion in sales in 2011. And now T&B products will have access to ABB’s large global distribution network. It can only be described as a “win win” situation for both companies.
Here is why: Thomas & Betts’s main business is manufacturing low-voltage and ultralow-voltage electrical products such as connectors, conduits and fittings as well as wiring management products for the construction, industrial and utilities markets. These are complementary to the offering of ABB’s Low Voltage Products division, which includes products such as breakers and switches. In addition, Thomas & Betts has a leading logistics model with its distributors that allow simple, single invoicing and fast delivery of its full product scope. Thomas & Betts also supplies towers for electrical power transmission and has a business that produces heating, ventilation and air conditioning units, both new to ABB but related to its core power and automation focus, the company says.
Thomas & Betts, combined with ABB’s North American low-voltage products business, will become a new global business unit led out of Memphis, Tenn., under the leadership of Dominic Pileggi, chairman and CEO of T&B.
And ABB’s expansion is not going to end there. ABB’s CEO Joe Hogan has a large war chest waiting to be used for other purchases. Watch this company because you’re going to hear plenty about their acquisition activities in the years ahead.
In looking back at this year, the word footprint was used time and time again by companies buying their counterparts.
In May, Rexel acquired Platt Electric Supply in order to strengthen its market share in the Western region of the United States. The company’s market share in that section of the country is expected to grow at a faster rate than the overall U.S. market. “We don’t have a strong footprint in the northwest and Platt has a great presence,” a spokesman said. “This does wonders for us in that region of the country.”
Based on Platt’s business model, the company will report into Rexel Inc.—one of the two (with Gexpro being the other) primary branches of Rexel Holdings USA in the electrical distribution industry.
Established in 1953, Platt Electric Supply has 111 locations throughout California, Nevada, Idaho, Oregon, Montana, Utah and Washington. It is believed to be the largest regional electrical distributor in the Pacific Northwest and Mountain states.
While Rexel’s biggest acquisition in the United States was its purchase of Gexpro (formerly GE Supply) in 2006, the Platt deal is as large as any of its past purchases of other big regional distributors, including Branch Group, and Consolidated Electrical Supply.
Rexel also purchased Munro Distributing in Fall River, Mass. Munro is an electrical distributor that has provided energy efficiency solutions for thousands of projects, including some of the nation’s largest LEED initiatives. Munro has also supplied nearly one million square feet of residential, commercial and municipal rooftops with solar arrays. The company has 12 branches in five states.
And Sonepar USA, a subsidiary of the privately-held Sonepar Group, purchased Codale Electric Supply, Inc.
Founded in 1975 by Dale P. Holt as a single 5,000-sq-ft. location with just five employees, Codale now has locations in Utah, Nevada and Wyoming. The company is ranked as one of the largest independent electrical distributer in those markets. Codale serves customers in a wide range of markets served from residential, commercial and industrial, to utility transmission, distribution, and substation design and assembly.
Sonepar also made several recent acquisitions outside the United States.
A blockbuster deal
Then there was the blockbuster deal that was completed Nov. 30th: Eaton Corp.’s $11.9 billion deal with Cooper Industries. This is not only the biggest deal of the year but one of the biggest in decades in the electrical business.
In an interview with financial analysts, Sandy Cutler, CEO of Eaton, pointed out that electrical will now make up the majority of sales for the international diversified manufacturer. And that’s saying something when you think of Eaton’s many other businesses such as hydraulics, truck manufacturing, etc. Cooper recorded more than $2.3 billion in sales last year.
This certainly is as game changer in the distribution business and the announcement of the deal came only a short time after ABB’s acquisition of Thomas & Betts. This deal, many say, may lead to a scramble among other electrical manufacturers to grow by acquisition.
Distributors and manufacturers aren’t only interested in expansion in the United States but also in the Canadian market. WESCO, the giant electrical distributor based in Pittsburgh, made two purchases in Canada. In October, WESCO announced its intention to purchase EECOL Electric, a Canadian full-line distributor of electrical equipment, products and services with 57 locations and $0.9 billion in sales. Only four months earlier, WESCO purchased Trydor Industries, a full-line distributor of high voltage and electrical products and services with offices in Surrey, Calgary and Edmonton, Canada. The company services utilities, independent power producers and utility contractors in Canada.
In June, WESCO also raised a few eyebrows with its purchase of Madison, Wisc.-based Conney Safety Products LLC, a provider of MRO safety products with revenues of about $85 million. With that purchase WESCO signaled its intention to accentuate the fact that it is much more than a pure electrical supplier but a provider of MRO and other products.
WESCO’s chairman John J. Engel clearly indicated that it would be looking to making more of these types of acquisitions.
Buying companies that allow you to expand your product offerings is a win-win for both an acquiring company and the one being bought.
Kaman expands presence in electrical sector
In August, Kaman Industrial Technologies, a well-known and large motion control/pt distributor acquired the Zeller Corp., a value added distributor of electrical and automation components and solutions provider. The purchase expands Kaman’s automation and motion control products line to include electrical controls and power distribution business. Zeller is a Schneider Electrical distribution partner. After the Zeller acquisition, Kaman and Schneider entered into a national distributor agreement.
The purchase raises the question as to whether Kaman or one of its PT/motion control competitors will look at other possible electrical distributor acquisitions. The lines in the motion control sector and the electrical/automation areas are blurring and it appears that will lead to further acquisitions.
The growth in acquisitions this year generally comes from two primary sources: private equity firms or through strategic buyers.
Jack Cahill, former president of Kaman Industrial Technologies and now president of a consulting firm that bears his name specializing in mergers and acquisitions says he sees more strategic buyer purchases today.
“Obviously it depends on the business you’re looking at but I’ve seen more strategic buys,” he said. Cahill says companies that are looking for acquisitions often are seeking those that have a good technical workforce and a strong existing customer base.
“It’s becoming very difficult to find people today,” he said noting that products have become so technical in nature.
“If an independent distributor has a service group that is tied into a customer base then it’s like gold for an acquiring company,” he said.
Cahill believes there still is a future for the smaller, independent distributor providing it specializes and has an intense focus on their customer base. To compete on a local basis with larger, better capitalized distributors on the basis of just products will be increasingly difficult, he said.
During the year there were dozens of other deals in the electrical business. To touch on just a few: Crescent Electric purchased Stoneway Electric, a distributor with about $130 million in sales and 14 locations. Stoneway, headquartered in Spokane, Wash., serves contractors, industrial and government customers from 16 stocking locations in Washington, Idaho, and Oregon.
Crescent also purchased the McCullough Electric Company, a 109-year-old industrial and automation specialist in Pittsburgh, Pa.
Expanding geographically
A number of deals led to electrical distributors buying some single or dual location companies, allowing those acquirers to expand geographically.
Turtle & Hughes, for example, headquartered in Linden, N.J. acquired Mag-Trol Long Beach, a distributor of a broad range of electrical and automation equipment, supplies and renewal equipment in Long Beach, Calif.
Mag-Trol also has a second location in Huntington, Beach, Calif. under the name Rhino Electric Supply. It is a provider of products and services to the Terminal Operators in the ports of Los Angeles and Long Beach as well as industrial customers in a number of sectors.
The pace of acquisitions does appear to be picking up. However, the multiples paid for many of these acquisitions were higher than in previous years. And many acquisition candidates are looking to higher premiums for their businesses based on what acquirers paid this year.
PwC (PricewaterhouseCoopers) a leading consulting, research and audit firm, which studies deal-making worldwide, says the U.S. manufacturing sector continues to be one of the positive forces for the growth of the U.S. economy.
“And although that growth might not be exorbitant, it appears that the United States offers a more stable alternative in a world of high uncertainty, resulting in its being the most active single country, in terms of both targets and acquirers,” the company said.
PwC points out that it remains remain cautiously optimistic for future industrial manufacturing deal making although, “some negative factors may have an impact on the sector: further economic deterioration, lower levels of new orders and revenues, and lack of confidence in the future growth of the sector all could cast a shadow over” future transactions.
Could that slow down the rush to merge? Only time will tell.
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Jack Keough was the editor of Industrial Distribution magazine for more than 26 years. He often speaks at many industry events and seminars. He can be reached at john.keough@comcast.net or keoughbiz@gmail.com
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