Coming off a softer year in 2018, merger and acquisition activity in the electrical distribution sector is up this year as both financial and strategic buyers remain active looking for viable companies to acquire.
In April, Sonepar USA named Kris Prebola as its new vice president of mergers and acquisitions, with company President Rob Taylor publicly announcing that Prebola’s “…unique experience across the business makes him well suited to lead this area for our organization.” Sonepar USA wouldn’t comment further on its mergers and acquisition (M&A) strategy but, judging by this recent move, one can safely assume that there are probably some new acquisitions in the multi-state electrical distributor’s future.
Sonepar’s latest move on the M&A front doesn’t surprise Joe Wagner, managing director at P&M Corporate Finance (PMCF), which tracks industrial distribution M&A activity on a quarterly basis in its Industrial Distributor M&A Pulse reports. “We’re continuing to see quite a bit of M&A activity right now, both from strategic buyers as well as financial buyers,” says Wagner.
Within the electrical distribution segment, for example, he says that 2019 is on pace to be better than 2018. “Through the middle of May, 2019 transaction volume is up 25% versus the same period last year,” he explains. “Last year was a down year for the industry in terms of number of deals, despite many headliner transactions still crossing the finish line in 2018.”
The volume of M&A deals within the electrical distribution segment may have been down in 2018, but the broader industrial distribution market was on a tear. According to PMCF’s most recent industry report, 2018 industrial distribution M&A volume convincingly exceeded 2017 levels (increasing 7.0% globally and 16.2% in the U.S.). This increase in volume correlates to continued economic strength in both Europe and the U.S. Despite increasing deal volumes in 2018, the company reports, public equity performance and macroeconomic indicators drove greater overall uncertainty that stemmed growth during the fourth quarter.
Grabbing New Opportunities
Assessing the current M&A landscape for electrical distribution, Wagner observes both “strategic” and “financial” buyers remain active. Current debt financing trends (i.e., is there money available to borrow? Are interest rates at an attractive level?) support continued transaction activity. “Even though interest rates have ticked up, they’re still at historically low levels,” Wagner explains. “As a result, the banks are willing to lend credit to good, quality companies at fairly attractive multiples.”
Equity capital markets also support historically attractive valuations. Strategic buyers have cash on hand and are seeking to supplement tepid organic growth with acquisitions to spur growth, while private equity funds continue to fund raise at record pace, which drives greater supply of equity capital. The electrical distribution space is particularly ripe for deals in 2019 from both strategic and financial buyers thanks to the level of fragmentation within the marketplace.
“Electrical distribution as a whole is obviously still a fragmented market,” says Wagner. “We’ve seen some of the larger players like Sonepar, Wesco, and Anixter doing acquisitions to offset tepid organic growth.”
The broader U.S. economic conditions are also factoring into the situation at this point. “We’re a decade into the current growth cycle as a broader economy,” Wagner explains. “When that happens, you begin to see reducing growth rates as the cycle progresses towards ‘peak’ or even a slight correction.” To offset these challenges, companies are turning to strategic M&A to spur growth, reach new geographic territories, grow their labor forces, or expand their product lines.
Measuring the Impacts
A highly-interconnected ecosystem, the electrical distribution industry gets impacted anytime large buys small, small merges with a like company, or third party invests in any sized distributorship or manufacturer. “When a large transaction happens, there’s going to be potential vendor conflicts,” says Wagner. “When a larger distributor purchases a smaller one in a geographic region that the former wasn’t previously working in, for instance, the lines around issues like geographic exclusivity begin to blur.”
“There’s a big push by larger acquirers to maintain the service and brand reputation of the businesses they’re acquiring,” Wagner explains. “To address these and other strategic considerations, we’re seeing more buyers choose to keep regional brands in place to drive growth.
M&A deals can also help smaller distributors achieve economies of scale in a world where Amazon Business and other competitors are making it hard for those companies to compete. If, for example, two small- to mid-sized distributors pool their resources by merging, they can effectively leverage the “power of one” through better economies of scale, shared technological assets, and other resources they may not have had individually.
Mergers and acquisitions can also help larger firms branch out without having to open new locations and hire new employees in a job market where the unemployment rate is currently at a 50-year low. Value-added distributors that are doing what companies like Amazon Business can’t (yet) do are already in demand right now. “There’s a huge opportunity out there, and particularly for value-added distributors that are doing more than just stocking and shipping,” says Wagner. “If they’re also kitting, handling minor assemblies, or providing consultancy services to customers as a distributor, that’s where the real opportunity exists to secure great value outcome in a transaction right now.”
Looking ahead, Wagner says overall economic drivers like housing starts, construction activity, and capital investment in machinery and equipment will all continue to drive activity in the electrical distribution space. “We’re seeing a bit of headwind at the macro level,” says Wagner, “I do think that within probably 24-36 months we’re going to see either a modest slowdown or a reduction in value multiples in M&A transactions.”
To distributors looking to either buy, sell, or merge this year, Wagner says “there’s still time to do something” ahead of any potential downturn. In fact, there’s no time like the present to start exploring your options, particularly if a merger or acquisition has been on your company’s to-do list for the last year or so. “The market is still strong; it usually takes 6-8 months to transact,” he concludes, “so we still have that duration in the current window to get a deal done and provide the investor or buyer a runway for post-transaction growth.”
Tagged with acquisition, m&a, merger