INDUSTRIAL DISTRIBUTOR M&A PULSE

Transcription

1 INDUSTRIAL DISTRIBUTOR M&A PULSE SEPTEMBER 2014 PMCF Transaction Update Page 2 PMCF Insights Page 3 INSIDE THIS ISSUE Trends in Distribution Page 4 Market Commentary & Equity Market Valuations Pages 5-7 M&A Activity Update Pages 8-9

2 Diversified Industrials September 2014 Diversified Industrials PMCF TRANSACTION UPDATE SALE OF E&R INDUSTRIAL SALES, INC. TO W.W. GRAINGER, INC. P&M Corporate Finance (PMCF) served as the exclusive financial advisor to E&R Industrial Sales, Inc. (E&R) of Sterling Heights, Michigan. The buyer was W.W. Grainger, Inc. (NYSE: GWW), North America s leading distributor of maintenance, repair and operating (MRO) supplies with 2013 sales of $9.4 billion. The acquisition blends the extensive technical expertise of E&R with the global supply chain of Grainger. Specifically, the combination supports Grainger s strategy of expanding its technical offering to customers while providing E&R with a global footprint. E&R is a significant player within industrial distribution with a history that spans over 40 years. It is a full-line distributor of metalworking, MRO and production supplies with 18 locations throughout the United States. E&R provides more than 100,000 products to over 4,000 customers in a variety of industries, including aerospace, automotive and general industrials. Its 350 team members specialize in providing in-depth and unique technical expertise. The sale of E&R to Grainger is a key milestone in the continued growth and progression of our great company, said Jerry Pizzimenti, E&R s president and primary shareholder. Our entire team is thrilled with the outcome of this transaction. My family started this business over 40 years ago and we are extremely enthusiastic about the opportunities ahead of us as part of Grainger. E&R shareholders hired PMCF to lead the sale process for the company. Jerry Pizzimenti noted, PMCF was critical to the success of this transaction. They understood our business and communicated the right story to ensure a successful transaction outcome for my family and me. Their consultation and investment banking expertise was instrumental in completing this transaction. I would highly recommend the PMCF team. PMCF Diversified Industrials Team PHIL GILBERT Managing Director phil.gilbert@pmcf.com JOE WAGNER Vice President joe.wagner@pmcf.com MIKE CONGLETON Associate mike.congleton@pmcf.com GRAHAM GILBERT Associate graham.gilbert@pmcf.com STEVE SIGFUSSON Associate steven.sigfusson@pmcf.com P&M Corporate Finance

3 Industrial Distributor M&A Pulse PMCF Insights Introducing the Industrial Distributor M&A Pulse Picking the right time to sell can be a daunting task. In fact, you may never know the right time to sell your company. Factors that impact the value of your business breadth and depth of product lines and value-added service offerings, customer entrenchment, strength of vendor relationships, geographic coverage, the presence of sustainable and supportable growth opportunities, balance sheet strength, capabilities of your management team and employees, macro level industry trends and M&A market activity, among others are numerous and overwhelming to assess quickly when trying to time your ultimate exit. To help simplify the process of assessing your company s sale readiness, we have narrowed the laundry list of attributes into three broader categories (1) market readiness, (2) company readiness and (3) personal readiness. The first attribute market readiness can be an important contributor to the success of any sale process and accordingly should be followed closely. However, it is also the category over which you have the least control. As such, we consider company readiness and personal readiness attributes you can significantly influence to be the most important areas to focus your efforts if a sale or capital transaction is in your future. We hope you find PMCF s Industrial Distributor M&A Pulse to be a simple and quick go-to resource for the most relevant market data and commentary, keeping you informed on that front while allowing you to focus your efforts where they belong your business. The Market has Legs and is Running It s no secret the industry is attracting significant interest from both financial and strategic investors, as evidenced by the rising number of transactions closed from 2009 through the twelve month period ended August 14 (see page 8). PMCF expects this trend will continue for the foreseeable future, driven by improving macro-level trends, a reprioritizing of efforts by corporate buyers to aggressively strengthen their competitive positions via acquisitions, a fragmented market that provides for a ripe universe of investment opportunities for private equity firms, and the overall availability of low-cost debt capital. Economic indicators continue to show signs of a sustained recovery on a macro level and also an attractive environment for distributors. Specifically, the August 14 Purchasing Managers Index (PMI) reading of 59.0 continued a streak of month-over-month gains and indicated the 15 th consecutive month of expansion in the U.S. manufacturing sector overall. In addition, improvement in the overall economy was supported by other indicators including privately-owned housing starts increasing 21.7% Y-o-Y versus July 2013 and the unemployment rate falling to 6.2% in July; the lowest rate since Although the economic recovery is well underway, slow organic growth has led many companies to execute acquisition-focused growth strategies. For example, we re seeing large industrial / MRO distributors seeking opportunities to further penetrate customers by becoming onestop-shops with differentiated, value-added capabilities that they previously lacked. Further, buyers are aggressively pursuing competitors in adjacent regions to strengthen their geographic footholds with key vendors and customers; the ability to meet a customer s needs not only in a single region but around the globe provides meaningful growth opportunities. These are just a sampling of strategies that are making the industrial distribution M&A market robust with activity. See page 9 for additional examples of M&A strategies being executed in recent deals. Finally, the capital markets are supporting these strategies. Debt capital continues to be available at both low interest rates and heightened levels as evidenced by an increase in the average debt / EBITDA multiple on deals completed from 3.4x in 2012 to 3.8x through 1H 14, according to GF Data Resources, a database covering several industries but focused exclusively on private equity transactions. Additional support for acquisitions across the market comes from two primary sources: (1) the availability of cash on hand at large corporates as a result of controlled growth and aggressive cost cutting post-recession and (2) the amount of private equity capital not yet invested which was estimated at approximately $400 billion at the end of 2013 in the Bain & Company Global Private Equity Report Sources: Institute for Supply Management, Federal Reserve Bank of St. Louis, US Census Bureau, GF Data Resources and Bain & Co. Global Private Equity Report -3 -

4 Diversified Industrials September 2014 Trends in Distribution What we re seeing Strategic buyers are aggressively pursuing acquisitions to augment tepid organic growth A resurgence in U.S. manufacturing continues Although still in its infancy, Amazon Supply and other retailers continue to pose a growing threat to traditional distributors Opportunities to execute roll-up strategies across a number of industrial distribution sectors are facilitating significant private equity capital investment Buyers are offering premium valuations for businesses that exhibit strong differentiation, possess superior reputations and have established geographic presences A soft beginning to Q was prevalent across distributor segments, but March proved to be a strong month. Despite a sluggish Q2 that continued into July and August, economic indicators and growing backlogs point to growth ahead Substantial cash resources of strategic acquirers, increasingly available bank financing, robust amounts of private equity capital and strong interest from strategic and financial buyers suggest that the M&A environment for industrial distributors should remain strong for the foreseeable future P&M Corporate Finance

5 Industrial Distributor M&A Pulse Market Commentary At the end of Q1, industry CEOs appeared optimistic about near-term performance, despite a sluggish beginning to the quarter which insiders blamed on severe winter weather. For some, their predictions proved to be true in Q2. Others experienced more modest successes in a quarter that Scott Davis, equity research analyst at Barclays, labeled mediocre. Still, CEOs remain positive about the remainder of the year. Several cited recently completed acquisitions as one source for that optimism. Others indicated an increasing appetite for acquisitions to drive growth. April 2014: Inclement weather negatively impacted first quarter 2014 sales in some regions of the US in January and February. However, we saw an increase in activity late in the quarter, which contributed to organic growth in the upstream sector across all segments. The outlook for the remainder of 2014 is encouraging. July 2014: "I'm pleased with our 18% quarter over quarter revenue growth. The second quarter revenue of $1,497 million was the second highest quarterly revenue in the company's history, surpassed only by the fourth quarter of We are also pleased to have completed two international acquisitions during the quarter: Hypteck in Norway, which expands our offshore capabilities, and MSD Engineering in Singapore, which broadens our valve and valve automation capability and technical support for our customers in Southeast Asia [Additionally,] we ended the second quarter with a backlog of $1,125 million, a new company record." Andrew R. Lane Chairman, President & Chief Executive Officer MRC Global April 2014: "This low growth economic environment provides an excellent opportunity for WESCO to further strengthen our position as an industry leader, and expand our customer and supplier relationships for long-term growth. We continue to invest in our growth engines and maintain a view that scale matters in distribution. The acquisitions of LaPrairie and Hazmasters were excellent additions to our Canadian business in the first quarter. Our acquisition pipeline remains robust, and we see continuing opportunities to strengthen our electrical core while broadening our portfolio of products and services. July 2014: "Our second quarter results reflect strong sales execution, along with improvement in our end markets and seasonal recovery from the severe winter weather conditions experienced earlier this year. Sales grew 6% organically, with growth in all four of our end markets. Sales in the U.S. were up 5%, sales in Canada were up 7% on a local currency basis, and sales for the rest of world were up over 13% [Additionally,] accelerating our One WESCO value proposition is a strategic priority and our leadership team is sharply focused on improving our market position both organically and through acquisitions. John J. Engel Chairman & Chief Executive Officer WESCO International August 2014: "Fiscal 2014 was a significant year of transition with our ERP deployments and acquisition activity. We enter fiscal 2015 with a great deal of momentum, especially when considering our recent acquisitions of Knox Oil Field Supply and Reliance Industrial Products. We have significantly enhanced our capabilities to serve North American oil and gas markets, and these acquisitions will add approximately $240 million of annual sales to our fiscal 2015 results. Overall, the new fiscal year includes many opportunities to accelerate our growth and profitability organically, via continued acquisition activity, and through our investments in technology and talent. We have a strong foundation, expanding capabilities, and a straightforward strategic plan to execute, and we are energized about the year ahead. Neil A. Schrimsher President & Chief Executive Officer Applied Industrial Technologies Sources: Company SEC filings and Barclays U.S. Multi-Industry Research, July 28,

6 Diversified Industrials September 2014 Publicly Traded Distributors Total TTM Net Total HQ Market Enterprise Gross EBITDA Debt / Enterprise Value / Company Name Location Cap. Value Revenue Margin Margin EBITDA Revenue EBITDA (1) $ in Millions Industrial / MRO / Safety W.W. Grainger, Inc. United States $ 16,839 $ 17,162 $ 9, % 15.6% 0.2x 1.8x 11.3x Fastenal Company United States 13,438 13,401 3, % 22.8% (0.0x) 3.8x 16.8x HD Supply Holdings, Inc. United States 5,433 10,992 8, % 8.5% 7.6x 1.3x 15.0x MSC Industrial Direct Co. Inc. United States 5,626 5,855 2, % 17.0% 0.5x 2.1x 12.6x MRC Global Inc. United States 2,532 3,894 5, % 6.6% 3.8x 0.7x 10.8x Applied Industrial Technologies United States 2,022 2,121 2, % 7.8% 0.5x 0.9x 11.0x United Stationers Inc. United States 1,584 2,096 5, % 5.0% 2.0x 0.4x 8.1x DXP Enterprises, Inc. United States 1,158 1,638 1, % 9.4% 3.7x 1.2x 12.7x Kaman Corporation United States 1,102 1,453 1, % 8.1% 2.5x 0.8x 10.3x Bossard Holding AG Switzerland 929 1, % 14.2% 1.4x 1.6x 11.4x Median 29.3% 9.0% 1.7x 1.2x 11.4x Electrical Products Rexel SA France $ 5,800 $ 8,992 $ 17, % 5.5% 3.5x 0.5x 9.8x WESCO International Inc. United States 3,735 5,202 7, % 6.5% 2.9x 0.7x 10.4x Anixter International Inc. United States 2,923 3,624 6, % 6.3% 1.8x 0.6x 9.2x Houston Wire & Cable Co. United States % 7.0% 2.0x 0.7x 10.3x Median 22.4% 6.4% 2.5x 0.6x 10.0x Building Products Wolseley plc Switzerland $ 14,118 $ 15,736 $ 22, % 6.1% 1.2x 0.7x 11.7x Watsco Inc. United States 3,004 3,627 3, % 7.9% 1.1x 0.9x 11.9x Pool Corp. United States 2,496 2,902 2, % 8.9% 2.1x 1.3x 15.0x Beacon Roofing Supply, Inc. United States 1,407 1,694 2, % 5.9% 2.1x 0.7x 12.6x Universal Forest Products Inc. United States 950 1,069 2, % 4.9% 0.9x 0.4x 8.8x Builders FirstSource, Inc. United States , % 4.2% 4.9x 0.6x 15.4x Median 23.5% 6.0% 1.7x 0.7x 12.2x Chemicals & Gases Airgas, Inc. United States $ 8,227 $ 10,676 $ 5, % 18.4% 2.6x 2.1x 11.3x Brenntag AG Germany 8,180 10,198 13, % 7.1% 2.2x 0.8x 11.2x Median 37.9% 12.8% 2.4x 1.4x 11.3x Median 26.1% 7.5% 2.1x 0.8x 11.3x Mean 28.8% 9.3% 2.2x 1.1x 11.7x (1) Multiple of EBITDA based on EBITDA inclusive of equity income from affiliates Market capitalizations and total enterprise values as of August 31, 2014; income statement and balance sheet data as of last period reported Currency conversions assume historical rate Source: Capital IQ P&M Corporate Finance

7 Industrial Distributor M&A Pulse Public Company Equity Performance & Trends Valuation Trends Through August 31, 2014 the Building Products segment had a median TEV / EBITDA multiple of 12.2x LTM earnings, 0.9x higher than the consolidated industrial distribution index; followed by Industrial / MRO / Safety, Chemical / Gases and Electrical Products at 11.4x, 11.3x and 10.0x, respectively The Industrial / MRO / Safety segment consistently traded with a TEV / Revenue multiple between 1.1x 1.4x through 2013 and the first half of 2014, averaging approximately 50% higher than the consolidated industrial distribution index median Q Q Q Q Q Q Q Q /31/14 Revenue Multiple Median 0.8x 0.8x 0.8x 0.8x 0.8x 0.8x 0.8x 0.8x 0.8x Mean 1.0x 1.0x 1.2x 1.1x 1.2x 1.2x 1.2x 1.2x 1.1x EBITDA Multiple (1) Median 9.8x 9.9x 11.6x 10.7x 11.7x 11.7x 11.9x 11.5x 11.3x Mean 10.1x 10.4x 11.6x 11.6x 12.0x 12.7x 12.4x 12.2x 11.7x (1) Multiple of EBITDA based on EBITDA inclusive of equity income from affiliates Quarterly figures based on the last trading day of each quarter shown Source: Capital IQ Equity Performance Equity performance industry wide was impacted in early 2014 due to a number of factors, including but not limited to the severe weather that hampered much of the country and the resulting uncertainty regarding the industrial sector and its longterm growth outlook. March, however, was a strong month for each segment. Since then, our index shows that the industry gave back much of its previous gains and ended the LTM period relatively flat. Several analysts suggest these declines were the result of over-ambitious forecasts after a strong March. We do not expect this trend to be on-going as the summer months come to an end Equity performance for the Industrial / MRO / Safety index lagged the other segments for much of the last twelve months due primarily to tepid organic growth expectations as the outlook in US manufacturing remained uncertain this highlighted a key reason for many companies in this segment pursuing aggressive acquisition mandates to drive growth. Since then, performance has recovered relative to the other segments which can only be viewed positively Values as of: August 31, 2014 S&P 500 Index: Industrial / MRO / Safety: Electrical Products: 98.1 Building Products: Chemicals & Gases: /31/13 10/31/13 12/31/13 02/28/14 04/30/14 06/30/14 08/31/14 Market capitalization indices with mixed currencies are converted into USD using historical spot rates Local currency quotes converted to USD using historical spot rates Source: Capital IQ -7 -

8 Diversified Industrials September 2014 Industrial Distribution M&A Activity Strategic Buyer Financial Buyer Undisclosed LTM Aug Index includes majority acquisitions of Trading Companies and Distributors, as classified by Capital IQ Index includes deals reported to Capital IQ through September 2, 2014 Source: Capital IQ Target Breakdown by Continent, Sep. '13 - Aug. '14 Buyer Breakdown by Continent, Sep. '13 - Aug. '14 Asia 12% ROW 9% North America 46% Asia 13% ROW 6% North America 48% Europe 33% Europe 33% Index includes majority acquisitions of Trading Companies and Distributors, as classified by Capital IQ Index includes deals reported to Capital IQ through September 2, 2014 Source: Capital IQ Select Transactions, YTD August 31, 2014 Close Implied EV / TTM Date Target Buyer Industry Segment EV Revenue EBITDA Pending Tri-Ed Distribution, Inc. Anixter International, Inc. Electronics $ x 11.7x Pending Dodson Steel Products, Inc. Texas Pipe and Supply Company, Ltd. Fluid Handling 110 n/a n/a Aug-14 Corrosion Fluid Products Corp. FCX Performance, Inc. Fluid Handling Proprietary Jul-14 Knox Oil Field Supply, Inc. Applied Industrial Technologies, Inc. Fluid Handling x n/a Jun-14 The Hillman Companies, Inc. CCMP Capital Advisors, LLC Industrial/MRO/Safety 1, x 12.8x May-14 MSD Engineering (Pte) Limited MRC Global Inc. Fluid Handling n/a n/a n/a May-14 Reliance Industrial Investments Ltd. Applied Industrial Technologies, Inc. Fluid Handling 189 n/a 8.2x Apr-14 Archway Sales, Inc. and Jacaab LLC Nexeo Solutions, LLC Chemicals & Gases x 9.9x Mar-14 Hazmasters Environmental Controls Inc. WESCO Distribution, Inc. Industrial/MRO/Safety n/a n/a n/a Feb-14 The DeWolf Companies, Inc. KODA Distribution Group, LLC Chemicals & Gases n/a n/a n/a Jan-14 Commercial Solutions Inc. Motion Industries (Canada), Inc. Industrial/MRO/Safety x 16.0x Jan-14 B27, LLC DXP Enterprises, Inc. Fluid Handling x 12.0x Blue shading represents a PMCF transaction Sources: Capital IQ, company websites and PMCF industry research P&M Corporate Finance

9 Industrial Distributor M&A Pulse Key Deal Highlights Established Platform CCMP Capital Advisors & Hillman Companies On June 30 th, 2014, CCMP Capital Advisors announced that is completed the acquisition of the Hillman Companies from Oak Hill Capital Partners. Founded in 1964 and headquartered in Cincinnati, Ohio, Hillman is a leading value-added distributor of fasteners, key duplication systems, engraved tags and related hardware items to over 26,000 customers in the US, Canada, Mexico, South America and Australia. These customers include home improvement centers, mass merchants, national and regional hardware stores, pet supply stores and other retailers. A. Joe Delgado, Managing Director of CCMP, said, The company has a tremendous platform, including a unique, high-touch sales and service team of over 800 members and a sophisticated sourcing and distribution network throughout the U.S., Canada and Mexico. We look forward to working to help drive Hillman s next phase of growth as the company expands organically and through strategic acquisitions into adjacent markets and new geographies. Product Portfolio Expansion WESCO International & Hazmasters, Inc. On March 10 th, 2014, WESCO International, Inc. completed the acquisition of Hazmasters, Inc., an independent Canadian distributor of safety products servicing customers in the industrial, construction, commercial, institution and government markets. Hazmasters has 14 branches across Canada and generated approximately $80 million in revenue last year. The acquisition expanded the company's presence in the Industrial / MRO / Safety market as it continues to focus on opportunities beyond electrical distribution. The company completed another safety related acquisition in July 2012 (Conney Safety Products). International Growth MRC Global & Hypteck AS / MSD Engineering MRC Global has been aggressive on the M&A front in the execution of its strategic objective of adding product lines to complete the company s global pipe, valve and fitting offering and expanding both its geographic reach and expertise. On May 27 th, MRC announced the acquisition of a privately held Norwegian company, Hypteck AS, a provider of instrumentation and process control products to the offshore, marine and onshore industries. On May 29 th, the company announced the acquisition of a valve distributor and automation solutions provider in Singapore, MSD Engineering Limited. Both acquisitions emphasize growth by acquisition in what are viewed by the company as key products and regions. Acquiring a Complementary Business DXP Enterprises & B27, LLC On January 2 nd, 2014, DXP Enterprises completed its acquisition of B27, LLC, a supplier of pump and integrated flow control solutions serving the oil & gas, power generation, air quality and industrial markets. The deal was valued at approximately $300 million. The acquisition is in-line with DXP s strategy of becoming a one-stop source for customer needs including flow control products, industrial supplies, safety products and power transmission products. The acquisition provides DXP with an enhanced portfolio and end-market and customer expansion including oil & gas, power generation and air quality. Dominant Market Share KODA Distribution Group & DeWolf Companies Private equity owned KODA Distribution Group, a specialty chemical distributor, continued executing its roll-up strategy as it made its fourth acquisition in the last year, DeWolf Companies, in February DeWolf Companies distributes specialty chemicals to the North American personal care, color cosmetics and household, industrial & institutional markets. KODA Distribution Group President & CEO, Frank Bergonzi, commented that the acquisition continues building the nation s predominant specialty chemical distribution platform focused on delivering technology to assist our customers in product development, process improvement and supply chain excellence. Sources: Company press releases -9 -

10 About PMCF P&M Corporate Finance (PMCF) is an investment banking firm, focused exclusively on middle market transactions, with professionals in Chicago, Detroit and across the globe through Corporate Finance International associates. Our dedicated Diversified Industrials Group has deep industry knowledge and covers a wide range of industries including aerospace & defense, automotive, energy and industrial distribution. Offering a breadth of advisory services, the Diversified Industrials Group has helped clients worldwide meet their sale, acquisition, financing and strategic growth objectives. Investment Banking Services: Mergers & Acquisitions Sales & Divestitures Capital Raising Strategic Assessments Chicago 225 W. Washington Street, Suite 2700 Chicago, IL Detroit Two Towne Square, Suite 425 Southfield, MI Select PMCF Industrial Distribution Transactions This market overview is not an offer to sell or a solicitation of an offer to buy any security. It is not intended to be directed to investors as a basis for making an investment decision. This market overview does not rate or recommend securities of individual companies, nor does it contain sufficient information upon which to make an investment decision. P&M Corporate Finance, LLC will seek to provide investment banking and/or other services to one or more of the companies mentioned in this market overview. P&M Corporate Finance, LLC, and/or the analysts who prepared this market update, may own securities of one or more of the companies mentioned in this market overview. The information provided in this market overview was obtained from sources believed to be reliable, but its accuracy cannot be guaranteed. It is not to be construed as legal, accounting, financial, or investment advice. Information, opinions, and estimates reflect P&M Corporate Finance, LLC s judgment as of the date of publication and are subject to change without notice. P&M Corporate Finance, LLC undertakes no obligation to notify any recipient of this market overview of any such change. The charts and graphs used in this market overview have been compiled by P&M Corporate Finance, LLC solely for illustrative purposes. All charts are as ofthedateofissuance of this market overview, unless otherwise noted. The PMCF Industrial Distribution Index may not be inclusive of all companies in the industrial distribution industry and is not a composite index of the industrial distribution industry sector returns. Index and sector returns are past performance which is not an indicator of future results. This market overview is not directed to, or intended for distribution to, any person in any jurisdiction where such distribution would be contrary to law or regulation, or which would subject P&M Corporate Finance, LLC to licensing or registration requirements in such jurisdiction. P&M Corporate Finance