Q2 2015 INDUSTRIAL DISTRIBUTION - Capstone Partners | · PDF file · 2015-04-03Market trends suggest that distributors that differentiate themselves in ... Q1 2015 through March 24,

Q2 2015

BOSTON

CHICAGO

LONDON

LOS ANGELES

PHILADELPHIA

SAN DIEGO

SILICON VALLEY

TAMPA

INDUSTRIAL DISTRIBUTION

CONTACTS Todd McMahon Managing Director (617) 619-3334 [email protected] Daniel Schultz Director of Business Development (617) 619-3368 [email protected] Kyle Wilson Associate (617) 619-3309 [email protected]

M&A ACTVITY KEEPING PACE THROUGH THE START OF THE YEAR

The industrial distribution sector clinched its third consecutive year of greater than 100 M&A

transactions reported in the U.S. and Canada in 2014. The 118 transactions announced in 2014

fell just short of record deal activity in 2013, though all indications point to an active market that

is keeping pace. Through the first three months of 2015, 33 transactions were reported in the

sector, including several involving high profile market participants. Buyers remain plentiful and

are seeking to take advantage of the financing environment and put excess cash to work in

transactions. We expect the industry’s top-tier participants to remain active in 2015.

The market outlook for the sector, and the broader economy, remains largely unchanged since

the end of last year and most distributors kicked-off the year on an optimistic, yet cautious note.

Two of the broader trends affecting the sector in early 2015 have been the strong increase in the

value of the U.S. Dollar and volatility in energy prices. As a result, distributors with significant

exports or energy market exposure, may face a challenging first half of the year. Interestingly,

however, international strategic buyers have been particularly active in either establishing or

expanding their operations in the U.S. market, which remains relatively resilient.

MARKET EMPHASIS ON VALUE-ADDED SERVICES INCREASING

In light of the current market dynamics and increasing competition for key industrial accounts,

Capstone has observed a gradual shift in the industry from breadth-of-product business strategies

towards value-added services. This is particularly clear with select large distributors such as

Fastenal that have embraced a wide range of value-added service offerings in recent years,

ranging from industrial vending and vendor managed inventory (VMI) to energy efficiency audits

and custom manufacturing. Just as importantly, many smaller distributors are effectively

competing in the market against larger catalogue-based distributors as a result of a high value-

added service offering. Market trends suggest that distributors that differentiate themselves in

this way may command premiums from buyers and investors compared with their peers.

Source: Capstone Partners LLC research and Capital IQ Includes only disclosed transactions in U.S. and Canada. Q1 2015 through March 24, 2015

Industrial Distribution Transactions

42

58 70

105

123 118

33

0

20

40

60

80

100

120

140

2009 2010 2011 2012 2013 2014 Q1 2015

Nu

mb

er o

f Tr

ansa

ctio

ns

The Industrial Distribution Spectrum: Public companies focused on providing a high

level of value-added services are generally valued at premiums to their peers.

Breadth of product line and ability to serve as a one-stop-shop remains important.

To be clear, breadth of product still matters and distributors will continue to be

motivated to serve as one-stop-shops for their customers’ industrial supply needs.

Diversifying product lines and customer base has been and will continue to be an

overarching theme in the sector. On a like-to-like basis, we see the value-added

provider as the one that ultimately not only flourishes in its market as a standalone,

but also catches the eye of the major diversified acquirers and demands increased

respect (and value) in the market.

2015 OUTLOOK & CONCLUSIONS

Like many industry participants, we have an optimistic, but cautious outlook for the

remainder of 2015. Interest rates are highly likely to increase in the U.S. this year

and the possibility of other potential headwinds exist. We are unable to point to any

one factor that we feel will cause a cooling in this hot market in the near-term, yet as

any business owner knows well, cycles come and go. Nonetheless, it is clear that

both strategic and private equity firms continue to be highly aggressive in the

industrial distribution sector. Given the significant flow of funds to the space, and

the strong start to the year, we believe business owners would be well advised to

consider taking advantage of the current market environment to realize value in their

assets. More importantly, one should be conscious of how much upside may (or may

not) exist from current levels.

Capstone Partners LLC 2

Industrial Distribution Q2 2015

VALUE-ADDED SERVICES High Value-Add Low Value-Add

DIV

ERSI

TY O

F P

RO

DU

CT

OFF

ERIN

GS

Specialized

Diversified

(10.3x EBITDA)

(10.8x EBITDA)

(14.7x EBITDA)

(9.2x EBITDA)

“Strategic and financial

acquirers are looking for

distributors that are able to

stay close to their customers by

providing value-added services.

The industry as a whole is

increasingly moving from a

volume focus to a value focus.”

– Todd McMahon,

Managing Director,

Industrial Distribution Team

NOTABLE RECENT M&A TRANSACTIONS

The last two quarters included several notable transactions and continued activity

among strategic and private equity acquirers that have been particularly acquisitive

in the market in recent years. Following are profiles of transactions that illustrate the

current trends, with additional select transactions listed in the following table.

Graybar Electric acquires Advantage Industrial Automation to expand its industrial

business. Electrical distribution giant Graybar announced its first acquisition since

2010 in March 2015, acquiring an automation and controls solutions business with

six locations in the southeastern U.S. We expect Graybar to remain active in the

market as it pursues its stated goal of diversifying its industrial OEM business further.

Sonepar continues to target North America-based acquisitions. Following a high

level of activity in recent years, French electrical distribution group Sonepar

announced back-to-back acquisitions of electrical distributors, Quality Electrical

Distribution (QED) and Electrical Distributors in March 2015. Look for Sonepar and its

international electrical distribution rival, Rexel, to continue their push into the U.S.

and adjacent markets as they diversify beyond Europe.

GHX completes a series of acquisitions to broaden its product lines and geographic

presence. GHX, a unit of United Distribution Group and a leading distributor of hose

and gaskets, has been particularly aggressive of late, announcing three acquisitions in

the past six months, primarily to expand its product lines and market penetration.

Anixter’s fastener business is divested to American Industrial Partners to allow for

greater focus on its core business. After announcing it would put its fastener

business up for sale in late 2014, Anixter has found a suitor in private equity firm

American Industrial Partners (AIP). We expect the deal to translate to increased

activity on behalf of Anixter, as it seeks to put this cash to work to add-on to its core

businesses in wire & cable and security solutions. Meanwhile, AIP is likely to pursue a

buy-and-build strategy with the fastener division, seeking fastener businesses with a

value-added orientation and diversified customer bases.

Brazos Private Equity portfolio company, BlackHawk Industrial increases value-

added offerings with Packaging Inc. BlackHawk Industrial, which is the buy-and-

build platform of Texas-based private equity firm, Brazos, is active in the market

again, this time looking to expand its value-added offerings. Packaging Inc. is focused

on technical and value-added packaging and fastening solutions and will complement

BlackHawk’s broader offerings. The deal is consistent with BlackHawk’s motto of “Big

Enough to Serve, Small Enough to Care” and value-added approach.

Distribution International (DI) is sold by Audax Group to global private equity

heavyweight Advent International. DI, one of the leading value-added distributors

of insulation and related MRO products has changed ownership. DI has been an

active acquirer in recent years, completing 10 acquisitions in the past three years

alone. Look for their new private equity owners to continue to put money to work

for the distributor, making additional bolt-on acquisitions and solidifying DI’s

presence in insulation distribution and potentially new product groups.



Transaction Value (mm)

TV / LTM

Date Target Acquirer Target Business Description Revenue EBITDA

03/24/15 Advantage Industrial Automation

Graybar Electric Co. Provides control and automation solutions to industrial users, OEMs and system integrators.

- - -

03/13/15 Electrical Distributors Sonepar USA Electrical wholesaler to the electrical contractor, industrial, institutional and end user markets.

- - -

03/06/15 QED, Inc. Sonepar USA Distributes electrical supplies. - - -

03/04/15 Certain Assets of Equarius Waterworks

Ferguson Enterprises Distributes water meters and related products. - - -

03/03/15 Fugitt Rubber and Supply GHX Industrial Distributes industrial and mechanical rubber products and supplies. - - -

02/23/15 All Current Electrical Sales

EBSCO Capital Sells electrical equipment to wholesale electrical distributors. - - -

02/17/15 Sims Welding Supply Matheson Tri-Gas Distributes welding and specialty gas supplies in Southern California. - - -

02/12/15 Anixter Fasteners Division

American Industrial Partners

Comprises fastener distribution division of Anixter International. $380.0 0.4x -

02/09/15 Munnell & Sherrill Bearing Distributors Distributes industrial products in the United States. - - -

01/28/15 Fentress Oil and Greg Wright Supply

RelaDyne Distributes lubricants and fuels. - - -

01/19/15 Power House Supply Collins Pipe & Supply Distributes technical solutions for the power industry. - - -

01/15/15 Miller Electric Supply Van Meter Distributes electrical supplies to individuals, contractors and corporate users.

- - -

01/15/15 Packaging Incorporated BlackHawk Industrial Distribution

Distributes packaging, fastening supplies, strapping tools and machinery for packaging applications.

- - -

01/14/15 Miller Bearings Motion Industries Supplies bearings, electric motors, power transmission components, couplings and motion control systems.

- - -

01/13/15 GCF, Inc. Kaman Corporation Distributes electrical, electronic, safety and automation and motion control products.

- - -

01/12/15 North American Breaker Company

NXT Capital and PNC RiverArch Capital

Engages in the wholesale distribution of circuit breakers. $78.0 - -

01/08/15 Burton Saw & Supply Company

Pfingsten Partners Provides tools and supplies for wood products manufacturing plants. - - -

01/05/15 Jensen Distribution Services

Ace Hardware Wholesale distributor of hardware to retailers in western states. - - -

01/02/15 Hose & Fittings GHX Industrial Distributes industrial hose products. - - -

12/16/14 Kelly Pipe Company JFE Shoji Trade America Distributes steel pipes, valves and pipe fittings. - - -

12/15/14 Distribution International Advent International Value-added distributor of thermal and acoustical insulation and related supplies.

- - -

12/05/14 Powertrack International Tecum Capital and Regent Square Capital

Markets hydraulic and industrial hoses and fittings in North America. - - -

12/05/14 Align Aerospace AVIC International Supplies hardware and related components to aerospace sector. - - -

12/02/14 HD Supply Distribution Services

The Home Depot Distributes builders hardware, rope, chain and accessories, rod and steel and garage storage products.

- - -

11/24/14 Specialty Pipe & Tube Synalloy Corporation Distributes steel pipes and tubes. $36.5 - -

11/21/14 Aero-Space Southwest Bossard Distributes fasteners and electronic components. - - -

11/18/14 Advantage Machine & Tool

Stellar Industrial Supply Distributes machine, cutting and measuring tools. - - -

11/17/14 Fastener Distribution Holdings

Housatonic Partners Distributes aircraft nut plates, self-locking nuts, threaded inserts and related high performance hardware.

- - -

11/11/14 Southern Fastening Systems

Carlson Systems Distributes tools and fasteners for wood construction projects and manufacturing operations.

- - -

11/06/14 Specialty Rubber & Gasket

GHX Industrial Supplies rubber products such as industrial gasket and hoses. - - -

11/03/14 Watertown Supply F.W. Webb Company Wholesale distributor specializing in piping, plumbing and heating repair parts.

- - -

10/29/14 Leading Edge Auto Refinishers

WESCO Distributes automotive paints. - - -

10/21/14 Goodman Industrial Wolseley Industrial Canada

Distributes industrial materials primarily serving the potash industry in Saskatchewan.

- - -

10/20/14 Titan Fastener Products Lindstrom Metric Operates as a fastener and industrial distributor. - - -

SELECT RECENT M&A TRANSACTIONS




PUBLIC COMPANY TRADING & OPERATING DATA


Price % 52 Wk Market Enterprise LTM 1-Yr Rev EV / LTM Company 3/24/15 High Cap Value Revenue EBITDA Margin Growth Revenue EBITDA General Industrial

Airgas $105.31 88.5% $7,910.8 $10,314.3 $5,271.0 $969.7 18.4% 4.0% 2.0x 10.6x

Applied Industrial Technologies $43.90 83.4% 1,805.1 2,121.3 2,667.7 214.2 8.0% 8.9% 0.8x 9.9x

Barnes Group $40.10 97.8% 2,190.6 2,649.6 1,262.0 267.4 21.2% 15.6% 2.1x 9.9x

DistributionNOW $20.47 54.4% 2,191.7 1,996.7 4,105.0 202.0 4.9% (4.4)% 0.5x 9.9x

DXP Enterprises $45.23 39.3% 643.0 1,054.5 1,499.7 140.0 9.3% 20.8% 0.7x 7.5x

Fastenal Company $42.22 80.9% 12,475.7 12,451.2 3,733.5 859.3 23.0% 12.2% 3.3x 14.5x

Genuine Parts Company $95.59 87.7% 14,596.5 15,275.4 15,341.6 1,272.5 8.3% 9.0% 1.0x 12.0x

Kaman Corporation $42.45 95.2% 1,152.1 1,420.9 1,795.0 146.9 8.2% 8.5% 0.8x 9.7x

MSC Industrial Direct $72.77 75.3% 4,502.4 4,951.3 2,839.7 466.4 16.4% 11.0% 1.7x 10.6x

Park-Ohio Holdings $52.08 79.8% 651.0 1,043.1 1,378.7 121.1 8.8% 14.6% 0.8x 8.6x

WW. Grainger $233.57 86.6% 15,684.7 16,019.1 9,965.0 1,594.1 16.0% 5.6% 1.6x 10.0x

Mean 13.0% 9.6% 1.4x 10.3x

Median 9.3% 9.0% 1.0x 9.9x

Harmonic Mean 10.4% NA 1.0x 10.0x

Electrical & Electronics

Anixter International $77.39 73.1% $2,543.5 $3,659.2 $6,445.5 $401.6 6.2% 3.5% 0.6x 9.1x

Arrow Electronics $64.67 99.5% 6,185.2 7,879.1 22,768.7 1,036.1 4.6% 6.6% 0.3x 7.6x

Avnet $47.12 97.8% 6,426.0 7,624.2 28,123.8 1,050.3 3.7% 5.5% 0.3x 7.3x

Houston Wire & Cable Company $9.55 68.2% 166.4 223.3 390.0 28.3 7.3% 1.8% 0.6x 7.9x

Rexel SA $19.56 91.7% 5,677.7 8,097.8 15,833.9 678.9 4.3% 0.5% 0.5x 11.9x

WESCO International $67.85 72.9% 3,023.6 4,346.4 7,889.6 523.7 6.6% 5.0% 0.6x 8.3x

Mean 5.5% 3.8% 0.5x 8.7x

Median 5.4% 4.3% 0.5x 8.1x

Harmonic Mean 5.1% 1.8% 0.4x 8.4x

Construction & Energy

Beacon Roofing Supply $30.66 78.0% $1,517.4 $1,743.2 $2,370.8 $126.1 5.3% 4.0% 0.7x 13.8x

Builders FirstSource $6.35 67.6% 623.6 989.7 1,604.1 60.6 3.8% 7.7% 0.6x 16.3x

HD Supply Holdings $29.40 94.9% 5,756.1 11,157.1 8,882.0 851.0 9.6% 4.7% 1.3x 13.1x

MRC Global $11.63 39.2% 1,187.4 2,616.0 5,933.2 399.9 6.7% 13.4% 0.4x 6.5x

Pool Corp $70.39 99.6% 3,070.4 3,379.5 2,246.6 204.2 9.1% 8.0% 1.5x 16.5x

Universal Forest Products $52.79 90.8% 1,055.1 1,154.4 2,660.3 130.3 4.9% 7.7% 0.4x 8.9x

Watsco $123.45 99.2% 3,995.7 4,523.4 3,944.5 323.7 8.2% 5.4% 1.1x 14.0x

Wolseley plc $62.91 99.2% 16,172.6 17,281.3 20,288.4 1,148.0 5.7% 4.3% 0.9x 15.1x

Mean 6.7% 6.9% 0.9x 13.0x

Median 6.2% 6.5% 0.8x 13.9x

Harmonic Mean 6.1% 6.0% 0.7x 11.9x

Aerospace & Defense

B/E Aerospace $62.64 61.9% $6,637.5 $8,534.1 $2,599.0 $464.8 17.9% 18.0% 3.3x 18.4x

KLX Inc. $39.85 84.3% 2,090.7 2,819.9 1,695.7 371.7 21.9% 31.3% 1.7x 7.6x

TransDigm Group $215.79 95.4% 11,374.1 17,877.8 2,430.5 1,071.7 44.1% 20.1% 7.4x 16.7x

Wesco Aircraft Holdings $15.73 68.5% 1,522.0 2,513.8 1,504.9 209.5 13.9% 64.6% 1.7x 12.0x

Mean 24.5% 33.5% 3.5x 13.7x

Median 19.9% 25.7% 2.5x 14.3x

Harmonic Mean 20.4% 26.2% 2.4x 12.1x

$ in millions, except per share data

EV = enterprise value; LTM = last twelve months

Source: Capital IQ

Capstone Partners has completed several transactions within the industrial distribution sector. These transactions

involved companies across various industries, product offerings and stages of the business life cycle. Our experience in

the industrial distribution sector provides us with insight into the valuable attributes and valuation metrics of a target

company, the active buyers in the industry and the process of transactions in this space.


CAPSTONE PARTNERS: INDUSTRIAL DISTRIBUTION TRANSACTIONS


has sold certain assets to

has been acquired by

has recapitalized with has been

acquired by has been

acquired by


has sold certain assets to




CONFIDENTIAL

corporate sale

(IN MARKET)

ELECTRONICS &

INDUSTRIAL FASTENER

DISTRIBUTION


Todd McMahon, Managing Director

[email protected] • (617) 619-3334

Todd McMahon possesses over 20 years of transaction, financial services and

corporate executive experience. Prior to Capstone, Todd was President of Array

Financial Services, a Boston based boutique M&A advisory firm he founded in 2002.

He began his career at Putnam Investments, later moving to Bank Boston’s

investment banking group. Later, Todd served as Managing Director at Ross

Crossland Weston/RCW Mirus, where he was responsible for managing the firm’s

technology investment banking practice. Todd’s investment banking experience is

complemented by his involvement as an entrepreneur and investor where he was

involved in various consolidation transactions, raised over $30mm of debt and equity

financing and was responsible for managing all aspects of operations. He earned his

MBA from Boston University and his BA from the University of Massachusetts.

Daniel Schultz, Director of Business Development


Dan oversees Capstone’s national business development and industry coverage

activities, working closely with current and prospective clients of the firm on matters

related to corporate sales, recapitalizations, mergers & acquisitions and growth

financings. In his role, Dan is able to deliver specific market intelligence to clients

regarding M&A, financing, strategic, industry and competitive trends. Prior to

spearheading the firm’s business development and market initiatives, he was a Vice

President in Capstone’s M&A group, managing numerous successful transactions

across a variety of industries. Dan also gained hands-on transaction experience as an

investment banker at Headwaters MB. He started his career with Ernst & Young’s

National Professional AABS practice and later worked in Assurance and Advisory

Business Services in the Denver office. Dan received a BE in Biomedical Engineering

with a Business Minor from Vanderbilt University. He earned an MBA and a Master

of Accountancy from the Daniels College of Business at the University of Denver.

Kyle Wilson, Associate


Kyle is an Associate with Capstone’s Boston investment banking team. He works

closely with senior team members and clients to execute corporate finance

transactions. Prior to joining Capstone, Kyle worked as an Analyst, and later as an

Associate, with BCMS Capital Advisors, a global boutique investment bank with

offices in 32 countries. While working at their North American headquarters in New

York City, Kyle focused primarily on M&A advisory for private, middle-market

companies based in the U.S. and abroad. His experience includes working with

businesses in a variety of industries, including manufacturing, distribution, energy,

chemicals, business services, healthcare and consumer products and services, as well

as cross-border transactions. He holds a BA in Economics from New York University.


THE INDUSTRIAL DISTRIBUTION TEAM


ABOUT CAPSTONE PARTNERS

Capstone Partners LLC is a premier investment banking firm dedicated to serving

the corporate finance needs of middle market business owners, investors and

creditors. The firm provides corporate sale & divestiture, merger & acquisition,

private placement, corporate restructuring, valuation and financial advisory

services. Capstone maintains various industry specialties including one in

Industrial Distribution. The firm also has a merchant banking capability to actively

co-invest in transactions. Headquartered in Boston, Capstone has offices in

Chicago, London, Los Angeles, Philadelphia, San Diego, Silicon Valley and Tampa.

© 2015 Capstone Partners LLC. All rights reserved.

World Class Wall Street Expertise. Built for the Middle Market.

CAPSTONE’S OFFICE LOCATIONS

For more information

about our expertise,

please visit

www.capstonellc.com

BOSTON

176 Federal Street

3rd Floor

Boston, MA 02110

(617) 619-3300

CHICAGO

200 South Wacker Drive

Suite 3100

Chicago, IL 60606

(312) 674-4531

LONDON

42 Brook Street

London W1K 5DB

United Kingdom

+44 (0) 203 427 5068

LOS ANGELES

23046 Avenida de la Carlota

Suite 600

Laguna Hills, CA 92653

(949) 460-6431

PHILADELPHA

1515 Market Street

12th Floor

Philadelphia, PA 19102

(215) 854-4063

SAN DIEGO

12707 High Bluff Drive

Suite 200

San Diego, CA 92130

(858) 926-5950

SILICON VALLEY

228 Hamilton Avenue

3rd Floor

Palo Alto, CA 94301

(650) 319-7370

TAMPA

1550 W Cleveland Street

Suite 10

Tampa, FL 33679

(813) 251-7285

Documents

Q2 2015 INDUSTRIAL DISTRIBUTION - Capstone Partners | · PDF file · 2015-04-03Market trends suggest that distributors that differentiate themselves in ... Q1 2015 through March 24,