By Bridget McCrea
After 15 years of honing its own acquisition strategy, Shealy Electrical Wholesalers negotiates a deal to be acquired by Border States Electric. Here’s a look at what went down behind the scenes at the deal-making table.
As an NAED member that’s well known for its activity in the merger and acquisitions (M&A) space, Shealy Electrical Wholesalers of West Columbia, S.C., caught the electrical distribution industry off guard in June when it announced that it was being acquired by Border States Electric of Fargo, N.D. Pending regulatory approval, the deal will be finalized on August 1, 2016. And with that, yet another independent, 17-location electrical distributor will be absorbed by a larger entity.
According to David White, Shealy Electrical’s president, Border States is one of the largest employee-owned electrical distributors in the U.S. With locations in 16 states, the company serves the construction, industrial, and utility markets. Like Shealy Electrical, Border States is an independent distributor, and a member of Affiliated Distributors and the North American Association of Utility Distributors.
“Our two companies share similar core values based on doing what’s right for our customers, employees, vendors and communities,” White said. “We both possess a strong desire to grow, encourage innovation and believe in the power of employee-ownership. Joining Border States will accelerate our goal of transitioning our company to the associates through an employee stock ownership plan (ESOP).”
That ESOP—a defined contribution employee benefit plan that allows employees to become owners of stock in the company they work for—was a driving factor behind the Shealy-Border States deal, according to White, whose firm implemented an ongoing corporate acquisition strategy about 15 years ago. During that time period, the independent distributor purchased five companies and added those entities to its portfolio. The company’s most recent acquisition was announced in August 2014 and involved Nova Lighting, a specialty lighting company with locations in Charlotte, N.C., Columbia S.C., and Greenville, S.C.
According to White, the deal took place after Shealy Electrical went through its typical “acquisition strategy” of identifying a good target and reaching out to its ownership and/or management team to discuss the possibilities. Now Shealy Electric is on the other side of the table thanks to some strong, existing bonds between the two companies’ leaders, and the fact that both organizations share an affinity for ESOPs. Still, White says the conversation initially took root in Shealy Electrical’s own boardroom. “Our shareholders, a few partners, and myself sat down recently to talk about an eventual, long-term strategy for ownership transition plans for our company,” White says. “We evaluated a few different available options, including the sale of the company to a private equity firm, a generational transition to family members, or starting our own ESOP – we were never interested in selling to the large consolidators.”
After exploring each of those options thoroughly, the group decided that an ESOP would be the best ownership transition plan for Shealy Electrical. A kind of employee benefit plan, similar in some ways to a profit-sharing plan, ESOP’s find companies setting up a “trust fund,” into which the firms contribute new shares of their own stock or cash to buy existing shares. According to the National Center for Employee Ownership, the ESOP can borrow money to buy new or existing shares, with the company making cash contributions to the plan to enable it to repay the loan.
“The ESOP most closely met the expectations we had for the long-term legacy of our business,” White says, “and the way we wanted to be able to take care of our employees.”
Regardless of how the plan acquires stock, company contributions to the trust are tax-deductible, within certain limits. Shares in the trust are allocated to individual employee accounts, with allocations made either on the basis of relative pay or some more equal formula. As employees accumulate seniority with the company, they acquire an increasing right to the shares in their account, a process known as “vesting.”
A few years ago, David White and his leadership team and shareholders began sharing their “ESOP vision” with their employees, and explaining that at some point in the near future the company would begin transitioning to employee ownership. “We talked to them about how the transition would work, and about how they would become the owners of the company,” says White.
In 2016, Shealy Electrical’s full transition to the ESOP would have been put into gear. “We were ready to go ahead and create the ESOP,” says White, “so in preparation for that we began visiting other electrical distribution firms that already were set up as ESOP companies. We started getting advice, learning about the implications, and hearing about the most desirable corporate cultures for ESOPs.” The distributor also conducted a feasibility study to determine whether it was in the right position to move forward with its ownership transition plan. “Everything came back positive,” says White, “so we decide to move forward.”
But then a funny thing happened during Shealy Electrical’s due diligence phase. One of the companies it visited and spoke with about eventually starting up an ESOP from scratch took a real interest in the smaller distributor’s ambition and efforts. That company was Border States—the very firm that’s now acquiring Shealy Electrical. “They were great about helping us through the setup process, but eventually we started talking about potentially joining their already 100% ESOP-owned company, in lieu of doing it on our own,” says White. “For a number of reasons, selling to Border States became—in our minds—overwhelmingly the best way to go.”
In part 2 of this series of stories on the merger between Shealy Electrical Wholesaling and Border States Supply, we look at how Shealy went from saying it was not up for sale to agreeing to the acquisition.
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