Over the past year, the electrical distribution industry has seen some blockbuster deals, including the public offering of Rexel SA; Rexel USA's acquisition of GE Supply Inc., Shelton, Conn.; the sale of HD Supply, Atlanta, to a group of private-equity firms; Paris-based Sonepar SA's recent unsolicited offer for Hagemeyer NV, Naarden, Netherlands; and the proposed acquisition by Consolidated Electrical Distributors Inc. (CED), Westlake Village, Calif., of US Electrical Services LLC (USESI), Exton, Pa.
HT Capital Advisors, New York, is an investment banking firm that has advised owners on the sale of their electrical supply houses for many years, and recently had an advisory role in the sale of four electrical distributorships — Crawford Electric Supply, Dallas, and Friedman Electric Supply Co., Exeter, Pa., which were acquired by Sonepar USA, Philadelphia; and Weidenbach-Brown Co., New Rochelle, N.Y., and Electrical Wholesalers Inc., Hartford, Conn., which were acquired by USESI. We asked Burke Burkhardt, HT Capital's senior managing director, about where industry consolidation is headed in the future.
EW: With the exception of the proposed sale of HD Supply and CED's proposed acquisition of USESI, as measured by announced transactions, acquisition activity has slowed significantly over the past several months. Do you anticipate that it will increase over the next year?
BB: Yes. We are in the initial stages of representing three companies, and many other owners are contemplating making a move. Once the sub-prime mortgage debacle is behind us and the residential housing market turns around, the acquisition climate should improve. Of course, in some overbuilt areas of the country it may take years for the residential construction markets to improve. Owners in these areas have really missed the boat and will not be able to sell their companies at attractive valuations. One of the major drivers of increased acquisition activity in all industries over the next couple of years is the fact that many company owners are anxious to sell their companies before the likely demise of the current favorable capital-gains rate.
EW: CED's acquisition of USESI surprised everyone. What do you think prompted USESI's two private-equity owners to back out so soon?
BB: The private-equity funds probably had some of their own financial problems (due to tightened credit markets) and may have been reigning in Worthy's acquisition activity. They may have become concerned about the effect the sub-prime mortgage debacle had on the housing industry and the economy in general. Also, CED may have just offered them a price they could not refuse.
EW: Why do you think CED was interested in USESI, given that its model for operating its branches is totally different from USESI's regional hub-and-spoke model?
BB: With its estimated 600 locations, CED has a stand-alone branch model, with the exception of its Standard Electric Supply operation in Massachusetts, which uses a hub-and-spoke operation. I think CED's owners and its management team headed by Dean Bursch recognized that with all of the major acquisitions over the past few years, the dynamics of the industry have changed dramatically. They were smart to recognize that in the face of competition from other players, (particularly Sonepar and Rexel) they had to also adapt a hub-and-spoke model to achieve continued growth. Rather than start from scratch, with USESI and Richard Worthy they have an established platform and immediately become a viable competitive force.
EW: Do you believe CED's acquisition of USESI will be another driving force behind an increased level of acquisition?
BB: Yes. I believe Richard Worthy will be knocking on the doors of many owners, and with CED behind him he will have the financial power to complete some large transactions. But the growth aspirations of the other large national companies — Sonepar, Rexel/GE Supply, WESCO and Graybar — will also be a major driving force. There are also some large regionals such as Border States Industries, Fargo, N.D.; Mayer Electric Supply, Birmingham, Ala.; Werner Electric Supply Co., Neenah, Wis.; and Summit Electric Supply, Albuquerque, N.M.; that I believe will also be seeking to grow through acquisitions. For example, Tony Burr, president of Sonepar USA, said in EW's July cover story (p. 26) that he wants to grow Sonepar USA's sales from approximately $3 billion to $5 billion within a three- to six-year time frame.
EW: What does this mean for the owners of other independent distributors?
BB: For the owners operating profitably and located in areas not dramatically affected by the current housing market problems, the window of opportunity will open wider over the next year to explore the sale of their companies at attractive valuations. There is nothing like orchestrating competition between two or more buyers to maximize the valuation and achieve an owner's other sale objectives.
EW: Have those strategic buyers with enormous amounts of cash that focus on middle-market companies expressed interest in the electrical distribution industry?
BB: A few private-equity funds have looked at some of the companies we have represented in the past, but typically the valuations they offered were lower than offered by strategic buyers. Last year one sizeable independent — One Source Distributors, San Diego — sold a majority interest to a private-equity fund, but we do not see that as the beginning of a trend. One of that company's principal owners wanted to sell his interest in preparation for retirement, and the other wanted to continue to run the business with a degree of independence and participate in the future growth of the business. Private-equity firms typically hold their investments three-to-five years, and it's likely that at some point the company will be sold to one of the major players.
Certain strategic buyers and private-equity funds are receptive to acquiring less than 100 percent ownership, which means they can offer owners a “second bite at the apple.” My company structured one transaction where the owners retained a 20 percent ownership position, with the right to “put” it to the buyer at some point in the future at a very attractive predetermined multiple of earnings.
“Burke” Burkhardt, senior managing director, HT Capital Advisors LLC, New York, has been quite active with acquisitions in the electrical industry. HT Capital has represented the owners of many well-known distributors in the sales of their businesses, including Braid Electric Supply, Nashville, Tenn.; Tristate Electrical Supply, Hagerstown, Md.; Viking Electric Supply, St. Paul, Minn.; Fromm Electric of Piscataway, Piscataway, N.J., and Kennedy Electrical Supply, Jamaica, N.Y. Burkhardt has written several articles for Electrical Wholesaling on mergers and acquisitions in the electrical wholesaling industry. He can be reached at (212) 759-9080 or by e-mail at [email protected].