Would You Say No to 100% of Sales?

Last week another round of incredulity went through the industry as another acquisition was announced.  Munro Distributing, an electrical distributor in Fall River, MA with 12 locations who serviced electrical contractors and is active in the solar market and in the energy efficiency / lighting retrofit market, was sold to Rexel for … $150M!  According to the press release, Munro’s 2011 sales was $114M and they are on-track for $150M in 2012.

And presumably at wonderful margins as the adjusted EBITDA was, according to sources, $23M (or 20.18% of 2011 sales or 15.33% of projected 2012 sales).  And the deal closes before the end of the year … helping avoid potential increased taxes (Affordable Care Tax of 3.8% and possible increased capital gains taxes).

Congratulations to the Munro boys … nice to see them capitalize upon the opportunity!

But the acquisition has generated a number of calls as people have asked “how did they get that much for the business?”  100%+ of sales!  Some comments from national chains have included:

• “ridiculous valuation”
• “don’t know how they could get to that number”
• “we saw the numbers and couldn’t justify it”
• “don’t understand rationale behind 1 to 1.5X sales as a value in the US or Canada”

While we won’t pretend to understand why, it is starting to inflate distributor expectations of what their business is worth.

Why could this be so “valuable” to Rexel?  Perhaps

• strategic alignment … seeking to fill holes in selected geographic areas?
• interest, and hence additional valuation, for the solar business and possibly the energy / lighting business?
• potential synergies with Rexel’s Northeast (ex-CLS) business?
• the desire for Rexel to invest euros into the U.S.?
• Rexel seeing the U.S. as a better investment than other locales in the world?
• Rexel seeking increased market share in the U.S. and expressing a vote of confidence in it’s U.S. operation?
• availability of cheap / interest free funding in Europe / France or tax or currency benefits?

In other words, we don’t really know (and we encourage you to share your ideas on why value an electrical distributor at 100% of sales). And remember, Rexel also paid almost 100% of sales for Platt in May.

And unfortunately IMARK loses another distributor.  They lost Stoneway earlier this fall (but the revenue stayed in the group as Stoneway was sold to Crescent Electric, an IMARK member.)

But, we also heard from a number of distributors in the last few days that Rexel has been calling some distributors with a formulaic offer for their business:

• 100% of last year sales – 90 + day receivables – inventory adjustment (if needed) + real estate
• Ownership to stay for 1-3 years
• Assistance in identifying additional locations for expansion
• deal must close by the end of the year