And Another One Bites the Dust

You remember the song by Queen …

Anyways, more electrical distributor consolidation … another southern California distributor has been acquired by a national chain.  What was an independent distribution market in less than a year has been largely converted to chains.  CED’s acquisition of Walters Wholesale marks the latest chapter in the consolidation saga.  Walters, according to last year’s EW Top 200 was ranked #28 in the country and had revenue in excess of $200M.

Many may wonder why the Coburn family, who own CED, wanted to acquire more distribution in California, where CED already has many branches (the largest distributor in the state). Especially given that Walters does not fit the prototypical CED profit center (their name for a branch) model where locations are essentially individual businesses.  Walters had a central distribution center (CDC) to serve its 20+ branches.

But remember, the Coburn family purchased USESI on the East Coast.  USESI’s model is essentially a CDC model (Standard Electric, Electrical Wholesalers, Maurice Electric, and others).  And essentially CED and USESI are sister companies.  We’ve heard that Walters will essentially be another sibling … a stand alone entity (and yes, for the time being it is staying in IMARK – another indication that it will be a separate company … (and theoretically could make other acquisitions that fit its business model – either locations to be fed by its CDC or other CDC-oriented companies.)  John Walters and Bill Durkee will still be managing Walters … so it’s business as usual.

Which makes one wonder, which is more profitable, the profit center model where each location essentially has its own P&L or a CDC model (or is there a certain size where one becomes more profitable than the other)?

Some other thoughts…

• With Sonepar and CED / Coburn family in acquisition mode, how many others in the top 50 will be acquired this year?  Presumably at some time Rexel will offer someone enough money to get them interested. Theoretically Crescent could make an acquisition (but our money is that they will make smaller ones initially as they don’t have a great track record on growth through acquisitions.) And when was the last time WESCO or Graybar made an electrical acquisition?
• As the “better / larger” distributors (or consider it the middle tier companies – $50-250M) are acquired, as a manufacturer, what changes in strategy should be considered?
• While IMARK benefits from the “rent a member” strategy for now, aside from volume, what’s the benefit to members (and is it truly supporting “independent distribution”?)
• With access to capital tight, are their regionals with growth aspirations who are willing to take on partners to fund their growth (equity partners) like OneSource did a number of years ago or, with banks being the lender of choice, will regionals, however, large, stay within a tightly defined geographic area?
• And with the economy in slow grow mode, generational issues, upcoming capital gains issues and other business dynamics, will the next 3 years transform the industry and result in greater consolidation?  (there will still be lots of distributors, but not too many are worried about the smaller distributor (<$20M) who is essentially a cash flow business or a wealthy generator for a family)

If you were thinking of selling, why? what are your criteria in evaluating buyers and whom do you think you would sell to?

If you are a manufacturer, are these acquisitions starting to make you think about a changing industry?

And the beat goes on … and more will bite the dust!