Connecting Tools & Lighting … NSI and IDEAL Deals

Last week there were two manufacturer acquisitions in the industry, both enabled the acquirers to expand their market reach by entering new product categories and customer bases, a classic growth strategy.

NSI Acquires Platinum Tools

NSI expanded its product portfolio into the datacom space by acquiring Platinum Tools.  For those not familiar with Platinum Tools, although they had tried to make some forays into the electrical space, Platinum has products for cable management solutions, structured wiring products, tester kits, cutters, crimpers and other products for electrical, industrial, security, audio/video, commercial, residential, datacom and telecom applications.  Most of its sales are to data com / electronics distributors.

NSI will reportedly continue to market these products under the Platinum brand as it will continue to market in the data com / electronics space while introducing the products through the NSi electrical distribution network.

According to ZoomInfo and Crunchbase, Platinum Tools is a $35-40M company.  The company has about 40 employees.

Some thoughts:

• While Platinum was known by many to be essentially an importer, it was seeking to enter the electrical distribution space as evidenced of attending prior NEMRA events to recruit manufacturer agents as well as its membership as an NAED member (and they have exhibited at some NAED conferences.)  This accelerates entry into the electrical market.
• Platinum’s strength was the electronic / data com market. The acquisition creates another platform opportunity for NSI and possibly an opportunity to sell some NSI products into that channel.
• Platinum can provide NSI an entry point into a number of national electronic distributors.
• Platinum also, according to its website has some international opportunities through its distribution network.
• With Platinum spending some time, energy and resources to enter into the electrical distribution industry, presumably there are some revenues in the electrical channel. Assuming IMARK accepts the Platinum product offering into the group under the NSI name, this can only accelerate sales.
• NSI is also a member of The Edge Group, an electronics / data com coop, whom IMARK has an alliance with.  This can also further assist the growth of Platinum Tools product sales.
• From an NSI viewpoint, it’s more products for its current rep network to sell (presuming it “rationalizes” its current electrical distribution rep network.)

Overall, could be a accretive to NSI and a benefit to electrical distributors to consolidate orders into one supplier … and maybe expand their offering to further serve contractor customers.

IDEAL Enters Lighting, Buys Cree

And then there was the big deal on Friday … IDEAL Industries announced that it bought Cree’s lighting business.  This was a shock for many in the industry. Not that Cree was sold as it has been rumored for awhile that Cree could, would, should be sold, but that IDEAL, whose only exposure to lighting is its lighting controls group (Audacy Wireless Lighting Control) and maybe connectors that it sells for lighting installation and perhaps to OEMs.

From a Cree viewpoint, this may be addition through subtraction.

• The lighting division was started years ago as a vehicle to test the market for the company’s LED chips. It couldn’t get lighting OEMs to adopt, so the company started its own business, which then grew.
• Then in 2011, when LED lighting sales were soaring, the company spent $525M to buy Ruud Lighting,  It was viewed as a “bold” step and doubling down on the business.  The deal was for $372M in cash, $211M in stock and then $85M to retire debt.  If memory recalls, Cree was doing about $1 billion in lighting.
• As Cree grew, reportedly other OEMs asked themselves “why buy Cree components and support a competitor?” While Cree may have some sales to this market, its share is reduced.
• Fast forward, the lighting market has changed. More competitors, decreased average selling price although more renovation conversions, Cree has had some execution challenges and Cree, strategically, has changed its focus.
• Its focus now is on silicon wafers through its Wolfspeed group. The company continues to invest in this fast growing and highly profitable segment.
• While Lighting has continued to be revenue challenged, In FY 2018, ended last June, the segment generated $569M in sales. This also includes retail (lamp sales primarily to Home Depot as well as e-conolight, which sells direct to contractors and end-users), so, sales through the electrical channel, or direct, would be lower.  According to one rep “They have experienced significant erosion over the past two years, but that still seems pretty low given they were about $1 billion 2-3 years ago.
  • This makes the sale price $39.5% of total sales (excluding earn-out) or 52.6% with earn-out.  So it was sold for a discount or, lighting companies can be bought for a discount (which may explain why Eaton is spinning off its lighting business … perhaps couldn’t sell?)
  • And Cree’s LED products business (components) is a $600M business that is relatively stagnant but has good margins.
• So, now they sell a reduced dollar business for $225M plus the potential for another $85M based upon achieving financial goals.

Addition through subtraction …

• Selling to IDEAL either infers that IDEAL really wanted the business and outbid others, or perhaps there weren’t others?
• Cree gets to sell a division that absorbed resources from other areas that need investment and have higher growth potential and better margins.
• Cree can now go to other OEMs and say “buy our components and chips, we don’t compete with you”.
• Presumably there will be a sourcing relationship between IDEAL and the “current Cree” (as would expect they will eventually change their name as IDEAL probably has either bought or licensed the name), so Cree picks up an OEM customer.
• It helps the stock price by reducing the drag on analyst / stockholder expectations (the stock was up on Friday).

Some other snippets

• Although the Cree press release projects that the deal will close in the fourth quarter, the Journal Times reports that it is expected to become final next quarter. So, there is going to be ownership change relatively quickly.
• Not much is expected to change on the manufacturing front and there is no plan to consolidate Cree Lighting operations into IDEAL. “We bought Cree because we like the Cree Lighting brand.” IDEAL, will however, “draw upon its existing talent and resources to help Cree Lighting.” She also stated that “IDEAL has what will be a very complementary sales force and can sell Cree Lighting products through its electrical distribution channel.”
• No plans to change the Cree name anytime soon (which may mean that Cree could change its corporate name or there will be a Cree Inc and Cree Lighting.)
• IDEAL currently has about 1500 employees.  The Cree acquisition essentially doubles this according to Meghan Juday when speaking to Cree employees in Sturvtevant, WI.  She also said “the company tries to manufacturer where its customer base is.”
• As an aside, she mentioned that the company has about 50 family members with many having personal commitments / affinity to Wisconsin.
• Reportedly Cree will continue to go to market through the existing management team but “benefit from some IDEAL experience”
• IDEAL’s philosophy about acquisitions is “patient capital” defined as “investing for 10 years, 15 years, even for the generation.”  This should be good news for lighting agents / reps and distributors … a commitment that the company will have long-term stability whereas as a publicly held company and given the changes over the past few years, as mentioned, rumors were around Cree.

Some industry comments

• Ideal is going all in on lighting. this will be a huge learning curve for them.
• Any clue what our good friends at IDEAL are thinking?  Everyone’s running away from Lighting and they’re running towards it? …..in a huge way?
• Don’t quite understand
• This could have some interesting ramifications indeed.

Thoughts on IDEAL

It’s an interesting acquisition by IDEAL. Totally outside what is perceived as their comfort zone and perhaps not complementary to “the IDEAL business”, but …

• Perhaps they have seen something in the Audacy business they like?
• Perhaps Cree was buying many connectors and IDEAL has learned something that way?
• Maybe IDEAL is developing a future generation of connectors that will facilitate wireless lighting controls and truly be the “Intel Inside” of lighting controls?
• Maybe they think they can run the business differently / better and it will meet their financial objectives (and running it as a privately-run company versus publicly held could benefit the company)?

One thing we can assume is that the local salesperson is facing many questions and probably with no answers!

Two deals that create product adjacencies for companies. NSI’s deal appears more complementary. IDEAL’s is probably a longer-term play.

What are your thoughts on these deals? And, specifically on the IDEAL / Cree deal, how could IDEAL benefit Cree, and possibly vice versa?