An Offer You Can’t Refuse

On April 13, Sonepar USA, a subsidiary of privately-held global leader Sonepar Group, announced that it had entered into an agreement to acquire nearly century-old, New York-based independent distributor City Electric, which will become part of Sonepar USA’s East Region.

“This acquisition extends our branch network to cover all of New York State,” shared Halsey Cook, President of Sonepar USA.  “The City Electric team and Sandra Rosecrans share our passion for customer satisfaction and we welcome them to the Sonepar group.”

News of the acquisition came as a shock to many in the industry who knew of City Electric’s strong succession plan and begged the question of whether such transactions will soon become a trend – e.g., will other highly-valued independent distributors opt for acquisition by larger national/chain players who present ‘an offer they can’t refuse?’

Following, industry experts Bill Attardi (an over 50-year industry veteran and owner of NJ-based Attardi Marketing), Jay Goodman (a 25+-year industry veteran and principal of PA-based consultancy Goodman & Company), and Rob Haslehurst (managing director at the Boston-based location of L.E.K. Consulting, a 30+-year-old strategy consulting firm specializing in the industrial, building products, retail, and consumer sectors) speculate on the future of independents and whether this recent acquisition portends more of the same in the future.

tED magazine: Per the Sonepar-City Electric transaction, do you foresee more of the same—e.g., that even independent distributors with strong succession plans in place may only remain intact until a bigger company makes them an offer they can’t refuse?

Attardi:  Consolidation in the electrical products industry has been happening for decades; I remember talking about it in the 1980s.  As for whether it will continue, most likely yes….but a lot of this business will continue to be done locally.

Goodman:  I believe that even a company with the best succession plan always has to look at potential exits, because while the company is worth a certain amount to its owners, it could be worth exponentially more to a potential acquirer, especially a very large entity that’s valuing the independent company based on much more than just EBITDA.  For example, 15 profitable branches represent a great family business, but if those 15 branches are concentrated in a geographic area with a 60% market share and a global giant wants to enter that geography, then the question isn’t what it’s worth to the family to sell, but what it’s worth to the acquirer to gain dominant market share in a growing geography overnight. I’d also suggest that the better the company is set up for succession, the higher its valuation will be to a potential acquirer.  With a professional and structured management team in place, an acquirer can buy the business and continue to run it ‘as is’ with no hiccups and no risk that once the family members leave the business will decline.  The more autonomous the independent business is, the easier it will be for an acquirer to integrate it into its operation.

tED magazine: Where might this trend lead? Do you feel that independents will ultimately be swallowed up and the electrical distribution industry will be populated with only ‘big guys?’

Attardi:  In the pizza business, for example, large outfits like Pizza Hut, Domino’s, and Papa John’s are definitely the ‘big guys,’ but the best pizza is often made by the local independent ‘mom and pop’ shops.  The same applies in the electrical products industry—independents often dominate their local market by knowing their customers (from living in the same community with them, going to the same schools, etc.) better than the conglomerates.  Independents play a big role in the distribution field and that continues to be reflected by the ongoing strength and growth of industry groups like AD and IMARK.

Goodman:  Like many industries, I do believe that we’ll be left with giants handling a large percentage of the market.  With their access to large sums of low-cost capital and their depth of inventory, etc., they can handle the scalable commodity supply and the large multi-location national accounts like General Motors, etc.  The behemoths are set up where they’ve institutionalized their systems and processes and can pop a branch up in Baton Rouge just as easily as Bakersfield. At the same time, however, I also foresee a tremendous opportunity for smaller, independent players who provide services like deep, niche technical know-how, and I think we’ll see independents commanding the premium they’ll need to survive over the behemoths by doing the things larger companies can’t do, aren’t set up to do, and frankly probably don’t want to do, which is any type of specialization.  Specializing in technology, product niches, or niche market segments are where the opportunities for smaller players lie.

Haslehurst:  From the perspective of other industries, the consolidation story is certainly not unique. In the face of online competition and business model disruption, scale is one of the most reliable ways to compete with acceptable economics. In that context, we do see many ‘mom and pop’ or mid-sized distributors finding more value selling to others (often around generational change). That said, however, there are many bases of competition beyond price (e.g., service, responsiveness, relationships, financial terms, value-add service, etc.) and smaller/independent players can still be relevant and differentiate. So, while there may be some consolidation, it’s likely that the distribution market will still be served by a range of different-sized players.

tED magazine: What top-line advice do you have for independents as it relates to either selling their business and/or remaining a successful independent?

Attardi:  I think that the electrical distribution business will continue to get more technical and contractors will be increasingly involved in more complex projects, so the need to stay on top of that may be pause for some local independent players to consider getting out.  But small business is what America’s all about and I think that local players need to leverage their access to the local market as a source of strength and differentiation.

Goodman:  I agree – they should leverage the ability to be quick and nimble, find niches where they can create value, and not be afraid to charge for it. Independents who want to groom their family business for an exit just need to remember that large players don’t need to acquire what they already have.  If you’re doing something similar to them, it’s a dangerous place to be, especially if you have some considerable scale (via multiple branches, etc.).  If you’re too big to be ‘small’ or too small to be ‘big,’ you’ve got a big problem.  But if you’re a big player that acts small (entrepreneurial, quick, and nimble with intimate customer relationships and a commanding share of even a Tier 3 market, etc.), then I think you’re worth a lot to an acquirer.