Q2 2023 Ends with 8 Distributor Deals

Now that Q2 has ended it would be remiss to not mention two other distributor deals that occurred during the quarter. They are:

1. Electric Supply continued its expansion throughout Florida with the acquisition of Frontier Lighting, a small electrical distributor with 3 locations. Both companies are / were IMARK members. Electric Supply, which is primarily owned by Supply Chain Equity Partners, now has 7 locations and is growing organically as well as through acquisition.
2. Morrell Group, an automation company, was acquired by Platte River Equity and its portfolio company Womack Machine Supply Company. Morrell has seven locations in the US and one in Canada. The company is involved in electrical, mechanical, hydraulics, pneumatics and lubrication. For those not aware of Womack, the company has 6 locations (Billings, Salt Lake City, Dallas, Houston, Birmingham, and Phoenix and is involved in hydraulics, pneumatics, and automation. This is another acquisition that will benefit from industrial expansion in the U.S.

Adding these acquisitions to others this quarter (Billows acquired by Sonepar, CBT made an acquisition, Graybar’s acquisition of Valin and three more early in the quarter ) means that there were 8 acquisitions this quarter.

The question then becomes, with a slowing economy, will the acquisition market slow?

In my humble opinion, and yes, this is “consultantese”, the answer is “yes and no”.

There is always a market for “good” companies. The term is used in reference to larger companies that represent a strategic opportunity for an acquirer. This could be based upon:

• Size
• Geographic market
• Infrastructure
• Specific expertise

The large strategic acquirers still have some holes in their footprint and are looking to fill them … and they always have money. The Billows acquisition highlighted that companies will enter a bidding war for what they want. And companies that are “good” and have good balance sheets will attract bidders.

The emergence of more private equity firms as acquirers of electrical distributors is relatively new. This has been occurring in the HVAC market and now electrical with the sales of Wiseway and Republic. It’s an opportunity for those who want to remain in the business. PE firms have monies to invest and could be options.

And companies are still doing “tuck-ins” to bolt-on branches to their business, but this is a relatively low multiple acquisition where ownership is proactively seeking an exit and relatively soon. It’s more the “disposal” of a business as there is not many alternatives. Expect low, if any, multiples going forward (and some may be asset-sales) as the assets of the business inevitably are nominal except for customer goodwill.

Will acquisitions continue? Yes, and we’ve heard of more discussions occurring, but to optimize a selling price, companies need to have been planning to sell and have been optimizing their business (profit-wise) to maximize their return. It’s a journey. But unless a bidding war ensues, or there are strategic reasons for the acquisition, distributors shouldn’t expect a win-fall in a slowing market. The high growth, high profit days of even last year are behind and the EBITDA growth will moderate, potentially leaving some with buyer’s remorse.

My guess, an acquisition slowdown in Q3 (after all, it is summer) followed by an uptick as the economy slows, 2024 outlook remains murky (especially with election season), end of year nears, owners get older with no succession and become more “frustrated” with ongoing labor challenges. More small companies will be on the market. The question becomes, who will be the buyers as this is not the target for strategic acquirers (could it be HVAC or plumbing distributors?)

Your guess on the number of deals between now and the end of the year? If the over / under is 10, what do you think?