Acquisitions Accelerate. Are You Scenario Planning?

The end of June brought three distribution acquisitions and last month brought four more, signaling that there will be a busy second half of the year.

July saw:

• Sonepar acquire Springfield Electric, a $200M+ distributor
• Teche Electric complete its acquisition of Reulet Electric. Chancellor Electric had owned 60 percent of Reulet and Reulet ownership / management owned the other 40 percent. Teche acquired all ownership interests.
• Guillevin, the Canadian sister company of CED, acquire McLoughlan Supplies in Canada
• And most recently Mc-Naughton-McKay acquire Caniff Electric.  This was McNaughton-McKay’s second acquisition in two months and, what makes it interesting, is that it is the first contractor-oriented distributor that McNaughton-McKay has acquired. The deal helped the company further diversify its business within Michigan.

Of interest is that all of these were contractor-oriented companies whereas many of the previous deals this year were Rockwell distributors.

So, why the rash of deals?

Perhaps they are coincidental or that the offer was “too good to pass up”?

Or perhaps ownership was:

• Getting along in age and had succession issues / concerns.
• The past few years, financially, for many distributors have been good.  PPP significantly improved the profitability of many companies. This year’s growth, even though much is price-driven, improves gross margin dollars, hence making it profitable from a financial viewpoint.
• Looking forward the industry growth rate will slow, even if there is a physical infrastructure bill.
• COVID, and the stress of managing a business in these times, could wear on ownership.
• Ownership may have looked at the business and said, “it’s changing”, perhaps no longer as “fun” and didn’t want to continue to invest.  There are more people “challenges”, increased personnel cost, increased technology investments, more competitive challenges, perhaps the need to invest in a new ERP system or building or other equipment.

Perhaps one of these, or a combination, made them think “now’s a good time to get out” and perhaps “enjoy life”. After all, COVID has made a number of people decide to leave the workforce, if they can. Reportedly 3-4 million people have left the workforce, many retiring, during the pandemic.

And, at the same time,

• Many acquirers are flush with cash because last year and this year have been good years.
• Borrowing is cheap. Companies have refinanced to reduce their debt load and borrowing, if necessary, is inexpensive.
• Companies that look at the business long-term recognize the need to “bulk up” to justify (and leverage) investments in technology, warehousing and, in a number of instances, “people”, especially people whose skill sets can be leveraged over larger volume (i.e., specialists, technology, digital marketing, eCommerce, purchasing, etc.).

We expect there to be more acquisitions:

• As mentioned in the last round of acquisitions, we would not be surprised to see 3-5 more Rockwell acquisitions this year.
• Further, there are bound to be more mid-size contractor-oriented distributors sold.
• It’s questionable if there will be many small distributors who sell as there are limited acquirers seeking these opportunities as “bolt-ons.”

What will be interesting is “who is left”. Are they independents that are taking the long-haul viewpoint and are structuring themselves to support multi-generations of management or will some be companies that are “left at the alter”, meaning, every national chain is in town, and no one wants to buy them … there isn’t a compelling, or financially enticing need?

While Rexel and WESCO inferred on their Q2 earnings calls that their financial debt ratios are improving and they could be looking at acquisitions, they may or may not look at electrical distributors. They could further diversify their businesses.

And reportedly Graybar is seeking other acquisitions like Shingle & Gibb deal. (Plus, remember that Graybar has made two acquisitions in less than a year!)

It is also interesting that the electrical industry is one of the few industries where private equity has not entered the market, aggressively done acquisitions, developed a national chain and then gone public via an IPO. There are examples in other industries (Core and Main, SiteOne Landscape, Beacon Roofing) where this occurred, and very profitably. There are still enough distributors in the market to accomplish this. (Maybe a SPAC, loaded with money, will acquire an electrical distributor and take it public and then make more deals!)

What does increased consolidation mean?

• From a manufacturer viewpoint, dealing with fewer distributors may require adjustments in your go-to-market strategy. Whom are you aligned with? Much depends upon your type of product category. The quality, and creativity, of your strategic account managers, is critical.
• The role of the rep can change. With consolidation, they may have less influence with distribution “senior management” or purchasing but may have more influence in demand creation as well as which distributor locally to support based upon relationships and their manufacturer’s preference on whom to support (based upon loyalty.)
• Deal registration, which has not been a significant part of the industry, may emerge as companies that “partner” on an opportunity may receive “deal preference”.
• Account-based marketing takes on increased importance.
• Distributor branding across broader territories becomes more feasible … which means delivering a consistent customer experience becomes more important.

As some initial takeaways (and yes, there are more things that need to be considered and some “scenario planning” that manufacturer should be doing … combining consolidation scenarios with secular trends.

Consolidation generates opportunities, and it can create challenges, for all segments of the industry ecosystem. The question becomes, will you be proactive or reactive to what is happening in the market?

How will industry consolidation impact you and your company?