Billion Dollar Buys: HD Power Solutions to Anixter, Interline to Home Depot

The last couple of weeks have seen a couple of billion dollar buys that will have some affect on electrical distributors and manufacturers for significantly different reasons and coincidentally both deals originated with Home Depot.

While independent entities, many will recall that Home Depot originally assembled the core assets that make up HD Supply though acquisitions of Hughes Supply, Edson Electric and many others. The business grew through acquisition (many of which, in most people’s minds, were overvalued at the time). The business was then spun off to three private equity owners with Home Depot retaining some of the business. Eventually the PE firms and Home Depot wrote off much, if not all, of their investment, the company more recently did an IPO and now seems to be going through some type of repositioning.  And Home Depot got out of the wholesale distribution business (as a separate entity).

Interline to Home Depot

Last week Home Depot acquired Interline Brands. While many distributors don’t feel that they directly compete with Interline, the distributor of a multitude of product offerings ranging from plumbing and cleaning supplies to HVAC, electrical, and other MRO products. They focus on the MRO market inclusive of property management, lodging, healthcare, education etc  and do sell to service/repair-focused contractors. And if you didn’t think the “commercial MRO” market was profitable, consider that the company was sold for 97% of sales!

A couple of thoughts:

• Interline historically had many private label brands. While Home Depot has much experience with private label, this acquisition can further help them pursue this offering as Interline may have had product categories, SKUs or relationships that Home Depot does not (remember, they were going after different end-user markets.)  This could have an impact on some manufacturers who were doing business with one or the other company.
• According to Home Depot’s management, they are not trying to rebuild Home Depot Supply. This makes sense as 1) the MRO market has better margins and 2) why get involved in the project quotation business with lower margins and higher overhead if you don’t have to?  Better to pursue the maintenance market (a la a more commercial version of Grainger and with Home Depot’s investments into eCommerce, they can leverage this to a broader audience and to address the perceived Amazon Business threat.)
• Interline has an 1100 person outside commissioned sales force! and 450 inside salespeople supported by 90 distribution locations. In theory, $1.57 million / outside salesperson.  In other words, “feet on the street” to pursue business. A way to win share is investing in salespeople – be where the customer is.
  • And part of their growth plan is to hire more salespeople!
• Speaking of MRO being profitable … their gross margins were / are 35%, comparable to Home Depot’s.

Electrical industry thoughts:

• If you’re a multi-discipline distributor, perhaps feet on the street to pursue opportunities makes sense.
• If you’re a distributor looking for a growth strategy, diversification to focus on segments could be effective.
• If you’re a manufacturer, how does this change your opportunities at Home Depot? At Interline? And what does private labeling mean for you at these companies?

HD Power Solutions to Anixter

The other deal, that is a little more directly related to the electrical industry is Anixter’s acquisition of HD Supply’s Power Solutions group.  This division, which grew to about $1.9 billion and Anixter paid $825 million (43.4% of sales), includes HD Supply’s electrical group as well as its utility group.  Industry watchers guesstimated that the split is 70% utility and 30% traditional electrical distribution (mostly South and Southwest based upon prior electrical acquisitions).

Some thoughts:

• Anixter needed to diversify and grow. As some will recall, supposedly Rexel and Sonepar sought to acquire them last year. When an agreeable price couldn’t be achieved, Anixter made a decision to accelerate growth, of which one element was to diversify.
• Electrical was a side business for HD and reportedly declined significantly during the recession (to the point it got merged with utility) but presumably has grown somewhat given the growth in the industry.  Utility, however, is the core for this business.  HD Supply has traditionally been considered one of the big three in the utility business … HD Supply, Irby / Sonepar and WESCO (in no particular order).
• What synergies and/or incremental sales opportunities, are there for Anixter into utilities for Anixter’s wire / cable business? Perhaps they are thinking of opportunities for smart grid? Rewiring for areas (or need for more / different types of cable that is needed for infrastructure needs?)
• Anixter has been growing their US full-line electrical business in the US. Key segments to date have been OEM, data and industrial. Reportedly they are also strong, electrically, in Canadal.
• It will be interesting to see how switchgear and control suppliers seek to align with Anixter. We know that they have had relationships with some, now they inherit relationships with others. Do they try to align with one or two?
• While Power Solution’s electrical group had some focus on resi based upon locations (especially Florida and Arizona), doubtful that Anixter makes this much of a longer-term focus as Anixter is more focused on industrial, data centers, OEMs, and larger project-oriented initiatives.
• And here’s some comments on slides that Anixter used to share its rationale about this deal (slides are here)
  • “Transforms Anixter into a leading North American electrical and utility platform”.  Comment:  Could “platform” infer that other acquisitions will be coming / are planned? Could they become the next serial acquirer? What segments (and they have lots of geography to add) …or
  • “Strengthens Anixter’s product offering providing a broader product portfolio, new supplier relationships and new customer verticals.” Comment: Could they expand into new geographic areas using their existing infrastructure / branches, gain access to lines and hire more electrical salespeople.  Anixter has been known to utilize their infrastructure for multiple divisions, essentially considering them as shipping locations.
  • “Provides industry-leading scale” Comment – our guesstimate is that they are probably doing around a $1 billion or so in electrical (non-wire / cable) in the US between Anixter and HD Power Solutions.  Makes them important to many manufacturers and provides the scale (and infrastructure) to generate, and fund, growth.  According to the slides, 33% of HD Supply is electrical (hence $600 million +/-)
  • Anixter currently generates 1% of sales in gear, controls and enclosures, 83% coming from wire & cable and 6% from MRO materials whereas HD Power Solutions is 24% wire & cable (which presumably Anixter can help with), 21% gear & controls, 6% automation, only 6% lighting (major growth opportunity for Anixter).
    • Anixter estimates that there is about 60% of HD Power Solutions’ offering that becomes new opportunities … access to lines / ideas to grow in other areas.

And Anixter is not unknown to manufacturers as some have national account people already assigned to Anixter and others are being pursued by Anixter (who make a pitch for the line based upon the segments they are pursuing and how they can help the manufacturer … a “niche”, mutually beneficial approach).

This is a company to watch for the future. While they’ve “nibbled” on the edges of the industry and may have occasionally been a project competitor, they could become much more significant in the future (and could help those looking for an exit strategy).

What’s your impression of these two deals?