An expert from KeyBanc Capital Markets shares an optimistic outlook for the electrical distribution industry in 2019
Since embarking on the new year just a few weeks ago, electrical product industry professionals are clamoring for a crystal ball view of what 2019 may hold. And with two major acquisitions (by Kendall and Sonepar) taking place in January alone, many distributors are wondering what that means for M&A activity the rest of the year. To help provide one perspective, tEDmag.com reached out to expert TJ Monico, Cleveland-based Managing Director and Head of Industrial Distribution Investment Banking for KeyBanc Capital Markets, a leading corporate and investment bank providing capital markets and advisory solutions to dynamic companies capitalizing on opportunities in changing industries.
Following, Monico shares insights on the economic environment for the year ahead in terms of construction and M&A activity, how distributors can best manage tariffs, and the strengths they should continue to capitalize on.
tED magazine: Please share a bit about your involvement with electrical distributors and other players in the electrical products industry.
Monico: In my role, I work to deliver the breadth of KeyBanc’s M&A advisory and financing/capital-raising services and advice to distribution companies and organizations that distribute products to industrial and commercial end markets. We’re business model-focused and work to support clients in everything from evaluating opportunities in the market, guiding them through all aspects of an ownership transition, and addressing succession issues to assessing opportunities to partner with private equity firms to diversify their portfolio and enhance their wealth, determining the appropriate timeline for any or all of the above, and more. We’re unique in that, being a full-service investment bank, we can support our clients (and advisory assignments) with financing.
tED magazine: How do you see 2019 shaping up in terms of the construction landscape and, in turn, for electrical distribution?
Monico: We feel good about the state of business this year. Based on interactions we’ve had with key decision-makers at our client organizations, there’s a lot of new construction and MRO activity underway nationwide. Our roster/backlog of advisory assignments at KeyBanc is up significantly and we’re expecting good momentum for the year. While it’s still early in the year and construction projects involving large dollars can often be unpredictable, the volatile stock market we ended 2018 with hasn’t translated into negative activity for the industry. We’re seeing strong construction activity driven by a number of segments, including healthcare, technology, aerospace, etc. throughout different regions of the country and for a variety of different reasons – whether to capitalize on lower-cost areas, solid population growth, robust employment opportunities, etc. And while new construction is strong, we expect that maintenance/upgrade activity will represent an even brighter spot as a function of the business sector’s increased understanding of the aging of its infrastructure and the efficiencies to be gained by retrofitting with any of the market’s wealth of energy-efficient technologies.
tED magazine: What’s the current state of consolidation and M&A among contractors, construction companies, and/or electrical distributors?
Monico: We expect 2019 to be a strong year from an M&A perspective. Publicly-traded companies and larger electrical distributors (and contracting firms) are entering the year with a clean balance sheet and the subsequent freedom to pursue acquisitions that can help diversify their portfolios with more stable MRO-focused and less project-spend activities within the distribution arena, which is a very fragmented market. As more and more companies come to understand the benefits of having scale and greater access to labor, we expect to see distributors continue to acquire each other as well as to diversify into other categories and higher-tech products sold to the same customers. For independent distributors, it’s an outstanding time to sell the business if they’re in the market for that, as both multiples and capital available for investment by private equity firms as well as corporations are at or near all-time highs.
tED magazine: In light of the fact that many electrical products are wholly or partially made in China, what impact will the tariffs on Chinese goods have on our industry and how can distributors best protect themselves against the economic volatility these tariffs have introduced?
Monico: It’s tough to predict what will happen in the future, but a lot of companies expect a change in the tariff policy and already proactively rolled out price increases over the last several months. Our best advice to distributors is to continue to proactively manage this unknown variable by engaging in open dialogue with their customers and vendors and operating with some degree of transparency to avoid surprises by tariff-related expenses. Obviously, this will be situation-dependent.
tED magazine: What final messages would you want to share with electrical distributors regarding the market this year?
Monico: There’s a lot of opportunity out there! Customers remain focused on and supportive of distributors who can differentiate themselves through higher levels of service, reliability, and technical expertise. And for those distributors considering the sale of their firms in the near future, there’s currently a lot of interest among private equity firms and strategic partners in helping distributors make a transition by aligning with a partner to help support their growth should they desire to stay involved and maintain varying degrees of operational control of their business.
TJ Monico, Cleveland-based Managing Director and Head of the Industrial Distribution Investment Banking for KeyBanc Capital Markets, can be reached at firstname.lastname@example.org, or visit KeyBanc Capital Markets at www.key.com.Tagged with acquisition, industry outlook, M&A