Did CED Blow the Whistle to Start the Acquisition Frenzy?

Many industry observers will recall when Branch Electric sold to Rexel in the spring of 2000. A number of distributors asked themselves what Chuck Steiner knew that they didn’t. Some openly felt that Steiner sold “at the top of the market”, and some quickly followed suit.

Which begs the question, did CED just usher in the next wave of consolidation?

With the electrical industry going into slow growth mode, the residential market not expected to exit from its doldrums for a couple of more years, margins tightening, credit tightening and over capacity, did CED see an opportunity to grow “inexpensively”? And remember, CED does not have a history of overpaying for acquisitions.

In considering CED’s acquisition of USESI, consider the following:

1. USESI was backed by private equity, specifically MSD Capital and Kelso & Company.
2. Seeing the slowdown in the economy, slow growth forecasts for the electrical industry, low single digit net margins, tightening credit markets for private equity, and possible opportunities to invest their funds for a higher return, perhaps investors decided to “take the money and run.”
3. A number of USESI’s businesses were heavily involved in the residential market, which has significantly deteriorated, especially in the Northeast and Florida.
4. Prospects for reaching the avowed “$2.5 billion” in sales before seeking an exit strategy were disappearing, especially given a supposed five-year time frame.
5. USESI has been relatively quite over the past four to six months on the acquisition trail (now we know why).
6. Reports from a number of distributors is that they were approached by USESI but were not interested in selling to them for a number of reasons.

Given this, CED’s offer may have been the best that was available while allowing the private equity investors to exit with some return on their investment.

Additionally, with Sonepar and supposedly Rexel interested in Hagemeyer, the winner may financially extend themselves for a little while. This would leave the “loser” as well as CED and HD Supply as potential major acquirers, providing an opportunity for strategic regional buyers to become more acquisitive.

So, if you are focused on the residential market or in an area where the economy has been significantly affected by the residential market, may be under capitalized, or have succession challenges, and you see a slow growth economy with tightening margins and continued personnel and technology challenges and investments, is now the time to consider an alternative “career”?

Will CED become 2007’s Branch Electric and sound the bell to sell? Will strategic regional acquirers, HD Supply and CED be winners in the next acquisition battle? And what eventually happens to potentially the industry’s quietest large company … Crescent?