C.A. “Burke” Burkhardt, senior managing director of HT Capital Advisors LLC, New York, has long been an active advisor in the electrical distribution market, having played a role on either the buyer side or seller side in some of the larger distributor acquisitions over the past couple of decades. Electrical Wholesaling caught some time with him to ask what he sees ahead in the ongoing consolidation of electrical distributors.
Are there reasons to expect a significant round of consolidation in electrical distribution in the near future?
Mergers/acquisitions increased for many industries over the past year. Historically an increase in M&A activity lags improvement in the economy. The worst recession in 80 years put a damper on M&A activity, but it officially ended about 18 months ago, and since then the economy has been gradually improving. A major factor supporting M&A activity is access to debt financing, which was almost completely unavailable during the recession but has become more readily available in recent months.
While there have been no major transactions announced in the electrical distribution industry so far in 2011, we anticipate that activity will soon increase. Bottom line, while their companies have experienced significantly improved operations, a resumption of revenue growth and increased profitability over the past six months, the major wholesale electrical nationals and regionals are on the acquisition trail again. HT Capital is currently in the market with three electrical distribution transactions, and we are receiving strong interest from several parties, at valuations which our clients find attractive.
So the consolidation trend has resumed. Several owners of “Top 200” distributors we met with at the NAED National recently told us they are ready to explore the sale of their companies. Like a lot of owners, they were left standing at the dock as the boat sailed away back in the 2006-2007 period when they probably could have sold their companies at attractive valuations. They do not want to miss the boat again, and another driving force is that they want to take advantage of the current record-low maximum 15 percent federal capital gains tax rate, which will be effective through December, 2012.
What kind of multiples are you seeing now, and how do those compare with historic valuations?
Based on the transactions we are currently working on, we believe that valuations will be attractive for sellers. They probably will not reach the over-8x adjusted EBITDA levels that were achieved on a few large premier companies during the feeding frenzy 2006-2007 period, when the nationals and some regionals were aggressively competing with one another. There may be some exceptions, but for most companies the EBITDA multiple will probably be in the historic 5x-7x range.
What can you infer about strategies of some of the big acquirers?
Growth through acquisition has always been and will again be a major focus of the large acquirers. Based on recent discussions with several of them, we gather they will be interested in both large transactions that give them a major position in a new geographic area, as well as smaller bolt-on acquisitions that enhance their position in an existing area.
Are there any product areas or market specialties that are especially hot?
Probably following the lead of WESCO with its acquisition of TVC, which enhanced its data communications platform, some of the majors have mentioned data communication distributors. MRO distributors have also been mentioned as an area of interest. Generally speaking, over the next year or so there will probably be more interest in companies with a strong industrial/automation focus, because of the still depressed residential and commercial construction markets in many areas.
Are deals now based more on credit facilities or cash?
With the bank debt financing now somewhat available, particularly to the large electrical distribution companies, we expect that some larger transactions may be financed partially with debt. But the large players probably have the ability the pay all cash.
Are any “wild-card” acquirers entering the market (from China or elsewhere)?
We are not talking at the moment to any foreign wild-card acquirers, but there are a couple that we have talked to in the past that could be interested. We have also been approached by some large U.S. distributors of other categories of industrial products expressing an interest in the wholesale electrical distribution industry. The rationale is that such an acquisition would enhance their product offerings because they are selling to the same customers.