industrial distributor m&a pulse - pmcf 2015_pulse.pdf · by an aggressive group of both...

INDUSTRIAL DISTRIBUTOR M&A PULSEFEBRUARY 2015

INSIDE THIS ISSUE

PMCF Transaction Update Page 2

PMCF Insights Page 3

Trends in Distribution Page 4

Market Commentary & Equity Market Valuations Pages 5–7

M&A Activity Update Pages 8–9

www.pmcf.com

Diversified Industrials – February 2015

P&M Corporate Finance, LLC

PHIL GILBERTManaging Director 248.223.3326 [email protected]

DIVERSIFIED INDUSTRIALS | PMCF TRANSACTION UPDATE

SALE OF CORROSION FLUID PRODUCTS TO FCX PERFORMANCE

P&M Corporate Finance (“PMCF”) served as the exclusive financial advisor to Corrosion Fluid Products Corporation (“Corrosion” or “CFP”) in its sale to FCX Performance, Inc. (“FCX”), a portfolio company of Harvest Partners (“Harvest”). The transaction closed in August 2014.

Based in Farmington Hills, Mich., CFP is a specialty regional distributor of pumps, valves, fiberglass, and specialty lined pipe, and hose & fittings to the process markets. Corrosion operates from eight branch distribution centers located across the key Midwestern states of Michigan, Illinois, Pennsylvania, Ohio, Indiana, and Iowa. In addition, CFP operates an extensive repairs business from four of its branches, providing its approxi-mately 2,500 customers with a full-suite of value-added distribution and repair services. Corrosion’s extensive product line spans nearly 900 vendor relationships, including primary distributor relationships with Flowserve, Resistoflex, Pureflex, and Sundyne, among others.

PMCF served as CFP’s exclusive investment banker and managed the sale process to a range of potential strategic and financial parties in a process that ultimately resulted in a successful transaction with FCX and Harvest.

JOE WAGNERDirector 312.602.3607 [email protected]

GRAHAM GILBERTAssociate 312.602.3619 [email protected]

MIKE CONGLETONAssociate 248.603.5036 [email protected]

PMCF Diversified Industrials Team

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Industrial Distributor M&A Pulse

PMCF Insights

INDUSTRIAL DISTRIBUTION IN 2014 AND BEYOND

A strong foundation for growth. In 2014, distributors benefited from improvements in macroeconomic fundamentals, continued investment in inventory and infrastructure that spurred purchase volume, and ongoing access to debt capital to finance growth initiatives. As 2015 gets underway, real GDP growth is expected to reach 3.2 percent compared to 2.4 percent in 2014. Industrial production grew 5.2 percent in December 2014, the highest in nearly four years. Unemployment rates dropped to 5.6 percent and the Purchasing Manager’s Index (PMI) remained above 50 yet again (as it has for the previous two years). With oil prices at their lowest since 2005, purchasers have more cash to spend on non-energy products, stimulating purchase volume. Consequently, the leading indicators of growth in industrial distribution appear to be lining up nicely in support of a strong foundation for a healthy distributor market in 2015.

Disruptive factors poised to impact these trends. Counterbalancing trends are causing some industrial distributors to re-think the longevity of healthy sales and earnings performance despite what appears to be a strong foundation for growth. Increased competition, flat pricing, low oil prices impacting demand for distributors serving energy related markets and the continued prominence of non-traditional, disruptive business models (e.g., online, direct-to-customer) affected the broader industry in 2014 and, in our view, will continue to shape sector-specific distribution environments in 2015. Consequently, companies eager to rely solely on organic growth may find an uphill battle.

M&A as a lifeline. M&A is being used aggressively to offset the counterbalancing trends outlined above. As discussed in our last quarterly publi-cation, companies that exhibit strong differentiating characteristics, such as value-added services, exclusive vendor or territory rights, and unique product expertise, among others, are attracting significant interest from sophisticated buyers and investors at premium valuations. Fortunately for both buyers and sellers, the market remains fragmented with thousands of domestic privately held industrial distribution companies. This inventory of potential future M&A candidates will continue to be targeted by an aggressive group of both strategic and financial buyers. Eventually, we expect the level of M&A activity to slow down as vendors consciously monitor the size and power of their distribution partners. While we don’t expect this to materialize in 2015, the trend is something worth watching during the current M&A cycle as it likely will impact M&A activity before the well of qualified M&A targets dries up.

Examples of strategic growth via acquisition in 2014. Several headliner transactions were completed in 2014 evidencing the importance of M&A in industrial distribution. Industrial valve and equip-ment distributor FCX Performance, a portfolio company of private equity fund Harvest Partners, acquired Corrosion Fluid Products and Pump Energy to strengthen its geographic presence in the Midwest and expand its full-service pump offerings. Fastenal completed the acquisition of Av-tech Industries to expand into the aerospace market. Applied Industrial Technologies’ acquisition of Knox Oil Field Supply increased its upstream oil & gas product offerings. WESCO completed multiple transactions, including the acquisitions of LaPrairie, Hi-Line Utility and Trydor EECOL. Combined, these acquisitions diversified WESCO’s presence into new end markets and services. Lastly, safety products distribution saw signifi-cant capital inflow from Grainger, WESCO, DXP Enterprises and 3M as each expanded their offering in this sector.

Sources: Institute for Supply Management and Federal Reserve Bank of St. Louis, Company Reports



Trends in Distribution What we’re seeing…

With acquisitions emerging as an important corporate strategy as companies fight for market share, M&A activity initiated by strategic as well as financial buyers looking for bolt-on acquisitions is expected to remain robust in 2015.

Consolidation remains a major trend due to customer demand for integrated providers, rela-tively cheap capital and indus-try players’ focus on expanded product offerings and geograph-ic expansion.

Prices remain flat due to low inflation and increased com-petition, leading to a focus on inorganic growth to drive higher volume.

Vendors are increasingly aware of consolidation activity impact-ing their distributor base — this is placing greater importance on creating a sustainable relation-ship with vendors.

Distributors failing to invest in their business — whether in the form of technology, processes or growth — will eventually lose their competitive differentiation.

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November 2014: “We continue to lead the consolidation of the large and highly fragmented MRO industry by responding to the evolving needs of our customers. In order to accelerate our share gain, we plan to increase our investments in growth and infrastructure in 2015 by an incremental $115 million to $150 million. These investments will also further strengthen our foundation that provides scale advantage for both our multichannel and single channel online models. We are stepping up our productivity efforts and expect to fund these investments through cost savings.”

January 2015: “There were, however, several bright spots in 2014, including the United States segment, which continued to perform very well, gaining share with large customers. We were also pleased with the single channel online model businesses in Japan, the United States and Europe, which continued their rapid growth. Longer term, we remain optimistic about our opportunities in the large and fragmented MRO.“

James T. Ryan, Chairman, President & Chief Executive Officer, W.W. Grainger

Market Commentary

October 2014: “Our third quarter results reflect strong sales execution and continued improvement in our end markets. Organic sales grew 7% with growth accelerating through the quarter. Sales were up in all four of our end markets for the second consecutive quarter. Organically, U.S. sales grew 8% while Canada sales grew 5% ... We continue to see favorable momentum in our customer base, including strengthening in non-residential construction, which we expect will result in ongoing growth in our key markets.”

December 2014: “Our acquisition pipeline remains robust, and we see excellent ongoing opportunities to strengthen our electrical core and broaden our portfolio of products and services. We are also pleased to announce a share repurchase program starting early next year. The free cash flow generation capability of our business supports continued investment in our growth initiatives, including acquisitions, while providing a return of capital to shareholders.“

John J. Engel, Chairman & Chief Executive Officer, WESCO International

October 2014: “Ninety-eight percent of our business is based right here in the world’s largest economy, and we believe the fundamentals for long-term growth in the U.S. economy, particularly in the manufacturing, construction and energy industries, will be favorable for years to come. Overall, we are seeing modestly strengthening business conditions and expect near-term continued improvement, despite softness in some sectors. Our guidance continues to assume acceleration in sales growth rates during the second half of the year.”

Peter McCausland, Executive Chairman, Airgas

Industry CEOs generally have an optimistic outlook for 2015, despite a challenging 2014 primarily blamed on the low growth economic environment. In the near term, many insiders remain cautious giv-en a sluggish global economy and a low inflationary environment domestically. Still, CEOs remain posi-tive about the prospects in the large and fragmented industrial distribution market. Several cited recently completed acquisitions as sources of momentum going into the new year. Others indicated improved optimism based on an increasing appetite for acquisitions and recent investments in infrastructure.

Sources: Company SEC filings, investor presentations and conference call transcripts



Publicly Traded Distributors

W.W. Grainger, Inc.Fastenal CompanyHD Supply Holdings, Inc.MSC Industrial Direct Co., Inc.MRC Global, Inc.United Stationers, Inc.Applied Industrial Technologies, Inc.Kaman CorporationDXP Enterprises, Inc.Bossard Holding AG

Company NameMarket

CapitalizationTotal Enterprise

ValueTTM

Revenue

TTMGross Margin

TTMEBITDAMargin

TEV/Revenue

TEV/EBITDA(1)

Net Debt/EBITDA

Industrial/MRO/Safety

Median

$ 15,903 13,162

5,645 4,645 1,103 1,568 1,679 1,031

593 782

$ 16,161 13,137 11,046

5,094 2,489 2,089 1,995 1,359 1,033

913

$ 9,965 3,734 9,025 2,840 5,933 5,327 2,667 1,774 1,431

676

43.3% 50.8% 29.3% 45.8% 17.2% 15.2% 27.9% 27.6% 29.4% 41.8%

29.3%

15.6% 23.0%

9.0% 16.4%

6.6% 4.9% 8.0% 7.9% 9.5%

14.2%

9.3%

0.2x (0.0x)6.7x 1.0x 3.6x 2.7x 1.5x 2.4x 3.2x 1.4x

1.9x

1.6x 3.5x 1.2x 1.8x 0.4x 0.4x 0.7x 0.8x 0.7x 1.4x

1.0x

10.4x 15.3x 13.6x 10.9x

6.4x 8.2x 9.3x 9.8x 7.6x 9.9x

9.8x

Rexel SAWESCO International, Inc.Anixter International, Inc.Houston Wire & Cable Co.

Electrical Products

Median

$ 5,435 2,970 2,475

194

$ 8,425 4,257 3,628

248

$ 15,834 7,890 6,446

395

24.3% 20.4% 22.8% 21.7%

22.3%

5.4% 6.8% 6.3% 7.0%

6.5%

3.1x 2.4x 2.8x 2.0x

2.6x

0.5x 0.5x 0.6x 0.6x

0.6x

10.7x 8.0x 9.0x 9.0x

9.0x

Wolseley plcWatsco, Inc.Pool Corp.Beacon Roofing Supply, Inc.Universal Forest Products, Inc.Builders FirstSource, Inc.

Building Products

Median

$ 15,088 3,535 2,701 1,172 1,000

581

$ 16,203 4,130 3,085 1,364 1,069

897

$ 22,170 3,945 2,247 2,371 2,660 1,576

28.0% 24.2% 28.6% 22.7% 12.2% 22.2%

23.5%

6.5% 8.2% 9.1% 5.3% 4.9% 3.8%

5.9%

0.9x 0.9x 1.5x 1.8x 0.8x 5.2x

1.2x

0.7x 1.0x 1.4x 0.6x 0.4x 0.6x

0.7x

12.7x 13.3x 15.5x 10.6x

8.4x 14.8x

13.0x

Airgas, Inc.Brenntag AG

Chemicals & Gases

Median

$ 8,414 8,428

$ 10,854 10,109

$ 5,271 12,394

55.5% 20.1%

37.8%

18.4% 7.1%

12.7%

2.5x 2.1x

2.3x

2.1x 0.8x

1.4x

11.4x 12.8x

12.1x

Median 26.0% 7.5% 2.0x 0.7x 10.5xMean 28.7% 9.3% 2.2x 1.0x 10.8x

$ in Millions

HQ Location

United StatesUnited StatesUnited StatesUnited StatesUnited StatesUnited StatesUnited StatesUnited StatesUnited StatesSwitzerland

FranceUnited StatesUnited StatesUnited States

SwitzerlandUnited StatesUnited StatesUnited StatesUnited StatesUnited States

United StatesGermany

Market capitalizations and total enterprise values as of January 31, 2015; income statement and balance sheet data as of last period reported(1) Multiple of EBITDA based on EBITDA inclusive of equity income from affiliates

Currency conversions assume historical rateSource: Capital IQ

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Public Company Equity Performance & Trends

Jan-15Jan-14 Apr-14 Jul-14 Oct-14

Chemicals/Gases - 95.7

S&P 500 Index - 108.9 Industrial/MRO/Safety - 90.3 Electrical Products - 75.1

Building Products - 100.2

80.0

100.0

70.0

90.0

110.0

120.0

130.0

Equity Performance• While the S&P 500 enjoyed healthy gains throughout 2014, industrial equities underperformed as a whole. Underwhelming

performance during the second half of the year was largely driven by plunging crude oil prices, which significantly impacted energy end markets.

• The Electrical Products segment performed substantially worse than other industrial subsets, finishing the year down 20.5 percent and carrying losses into 2015, down over 4.4 percent through January. Similarly, our Industrial/MRO/Safety index fell 7.3 percent to begin the year.

• Given these losses we expect inorganic growth through acquisitions to be a corporate strategy that permeates the market in 2015 as companies look to meet previously stated guidance in an otherwise modest growth environment.

Market capitalization indices with mixed currencies are converted into USD using historical spot ratesLocal currency quotes converted to USD using historical spot ratesSource: Capital IQ

Valuation Trends• Through December 31, 2014 the Building Products segment had a median TEV/EBITDA multiple of 12.6x TTM earnings, 1.4x

higher than the consolidated industrial distribution index; followed by Chemical & Gases, Industrial/MRO/Safety, and Electrical Products at 12.0x, 10.9x and 9.8x, respectively.

Revenue Multiple Median Mean

EBITDA Multiple(1) Median Mean

Q1 2013 Q2 2013 Q3 2013 Q4 2013 Q1 2014 Q2 2014 Q3 2014 Q4 2014

0.8x1.2x

11.3x11.5x

0.8x1.1x

10.7x11.6x

0.8x1.2x

11.7x12.0x

0.8x1.2x

11.6x12.2x

0.8x1.2x

11.8x12.0x

0.8x1.2x

11.5x12.2x

0.8x1.1x

10.9x11.1x

0.8x1.1x

11.2x11.4x

JAN 2015

0.8x1.0x

10.5x10.8x

PMCF Industrial Distribution Index Valuation

(1) Multiple of EBITDA based on EBITDA inclusive of equity income from affiliatesQuarterly figures based on the last trading day of each quarter shownSource: Capital IQ

Values as of: January 30, 2015



Industrial Distribution M&A Activity

386

215

342

479 503 504619

38

19

33

3147 36

49

29

24

29

3027 36

34

453

258

404

540577 576

702

20142008 2009 2010 2011 2012 2013

Strategic Buyer Financial Buyer Undisclosed

0

100

200

300

400

500

600

700

Select Transactions, Fiscal Year Ending 2014

Target Breakdown by Continent — 2014 Buyer Breakdown by Continent — 2014(1)

North America48%

Europe34%

Asia11%

ROW7%

North America51%Europe

32%

ROW5%

Asia12%

Nov-14Nov-14Sep-14Aug-14Jun-14May-14May-14Apr-14Feb-14Jan-14Jan-14Jan-14

CloseDate Target Buyer Industry Segment

EV/TTMRevenue

EV/TTMEBITDA

Specialty Pipe & Tube, Inc.Barr Quarries LimitedTri-Ed Distribution, Inc.Casco Automotive Group, Inc.The Hillman Companies, Inc.Machinery Tooling & Supply, LLCReliance Industrial Investments Ltd.Archway Sales, Inc. and Jacaab, LLCNave Communications CompanyHercules Tire & Rubber Company, Inc.Commercial Solutions, Inc.B27, LLC

Synalloy CorporationBreedon Aggregates LimitedAnixter International, Inc.Amphenol CorporationCCMP Capital Advisors, LLCDXP Enterprises, Inc.Applied Industrial Technologies, Inc.Nexeo Solutions, LLCADDvantage Technologies Group, Inc.American Tire Distributors, Inc.Motion Industries (Canada), Inc.DXP Enterprises, Inc.

Fluid HandlingBuilding Products

ElectronicsElectronics

Industrial/MRO/SafetyFluid HandlingFluid Handling

Chemicals & GasesElectronics

Industrial/MRO/SafetyIndustrial/MRO/Safety

Fluid Handling

1.2x0.8x0.7x2.1x2.1x0.4xn/a0.6x1.3x0.7x0.3x1.9x

n/a7.7x

11.7xn/a

12.8x 6.0x8.2x9.9x

12.0x18.8x16.0x12.0x

Implied EV

$ 3721

420449

1,47515

189129

18432

38316

Median 0.8x 11.8xMean 1.1x 11.5x

(1) Excludes 43 unidentifiable buyersIndex includes majority acquisitions of Trading Companies and Distributors, as classified by Capital IQ, as well as various transactions reported in industry publications

Index includes deals reported through December 31, 2014Source: Capital IQ, proprietary research

Index includes majority acquisitions of Trading Companies and Distributors, as classified by Capital IQ, as well as various transactions reported in industry publicationsIndex includes deals reported through December 31, 2014

Source: Capital IQ, proprietary research

Sources: Capital IQ, company websites and PMCF industry research

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American Industrial Partners (AIP) began 2015 by announcing its acquisition of the Fasteners segment of Anixter Inc. for $380 million in cash. Anixter’s Fastener segment is a leading supplier of screws, bolts and other fasteners to OEMs globally, serving customers in 15 countries and reporting revenues in excess of $930 million during 2014. The acquisition enables private equity group AIP to bolster its portfolio of North American industrial companies, which includes investments in aerospace, transportation, machining and other diversified industrial sectors. Anixter’s divestiture of the Fasteners division will allow the company to focus on its Enterprise Cabling & Security Solutions and Electrical and Electronic Wire & Cables segments.

On December 15, 2014, private equity group Advent International completed its acquisition of Distribution International, Inc. Distribution International is a distributor of specialty thermal and acoustical insulation and related fabricated products to the commercial building, chemicals, energy, locomotive and ma-rine end markets. The acquisition reinforces Advent’s already robust presence in the distribution and materials sectors, complementing existing holdings, which include HVAC distributor Morrison Supply Company and global resin manufacturer Allnex. As a result of this acquisition Advent now assumes control of one of the fastest growing fabricators of mechanical insulation in the US, as Distribution International has completed 11 acquisitions in the past four years.

On December 11, 2014, Ohio Transmission Corporation (OTC) completed the acquisition of Ohlheiser Corporation, a distributor of industrial automa-tion devices. The deal expands OTC’s national footprint, giving the company greater access to distribution channels in the Northeastern United States. Ohlheiser’s product lines include pneumatics, vacuum, fluid power, robotics, motion control, sensing and other devices, which are congruent with OTC’s current offerings. This is OTC’s second completed transaction in 2014, following the March 2014 purchase of Advanced Industrial Products, Inc.

Amphenol Corporation announced on August 29, 2014 its $450 million acquisition of Casco Automotive Group. Casco supplies highly engineered data connectivity, power and sensor products to the automotive markets, which Amphenol believes will complement its expansive global presence in the elec-trical interconnectivity market. Amphenol’s current products include electronic and fiber optic connectors, interconnect systems, antennas and high-speed specialty cable. Casco’s entrenchment with automotive OEMs strengthens Amphenol’s position in the sector and offers the opportunity to capitalize on shifting dynamics in automotive consumer preferences, given the growing demand for technologically integrated cars.

On August 11, 2014, Anixter International, Inc. announced its $420 million acquisition of Tri-Ed Distribution, Inc, North America’s largest independent security distributor. Tri-Ed holds a dominant position in the security market, providing video, access control, intrusion detection and fire/life safety equip-ment to over 20,000 active dealer and integrator customers. The acquisition highlights Anixter’s commitment to growing its security platform and diversi-fying its product portfolio. The deal also comes off the heels of Tri-Ed’s June 2014 acquisition of SecurityPro Warehouse, a leading wholesale distributor of security products and related equipment.

Key Deal Highlights

Dominant Market Share

Advent International Corporation & Distribution International, Inc.

Regional Penetration

Ohio Transmission Corporation & Ohlheiser Corporation

Acquiring a Complementary Business

Amphenol Corporation & Casco Automotive Group, Inc.

Portfolio Optimization

American Industrial Partners & Anixter Inc.

Product Portfolio Expansion

Anixter International, Inc. & Tri-Ed Distribution, Inc.

Sources: Company Press Releases



P&M Corporate Finance (PMCF) is an investment banking firm, focused exclusively on middle market transactions, with professionals in Chicago, Detroit and across the globe through Corporate Finance International associates. Our dedicated Diversified Industrials Group has deep industry knowledge and covers a wide range of industries including aerospace & defense, automotive, energy and industrial distribution. Offering a breadth of advisory services, the Diversified Industrials Group has helped clients worldwide meet their sale, acquisition, financing and strategic growth objectives.

Investment Banking Services:

• Mergers & Acquisitions

• Sales & Divestitures

• Capital Raising

• Strategic Assessments

CHICAGO 225 W. Washington St., Suite 2700

Chicago, IL 60606

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DETROIT Two Towne Square, Suite 425

Southfield, MI 48076

248.223.3300

About PMCF

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This market overview is not an offer to sell or a solicitation of an offer to buy any security. It is not intended to be directed to investors as a basis for making an investment decision. This market overview does not rate or recommend securities of individual companies, nor does it contain sufficient information upon which to make an investment decision.

P&M Corporate Finance, LLC will seek to provide investment banking and/or other services to one or more of the companies mentioned in this market overview.

P&M Corporate Finance, LLC, and/or the analysts who prepared this market update, may own securities of one or more of the companies mentioned in this market overview.

The information provided in this market overview was obtained from sources believed to be reliable, but its accuracy cannot be guaranteed. It is not to be construed as legal, accounting, financial, or investment advice. Information, opinions, and estimates reflect P&M Corporate Finance, LLC’s judgment as of the date of publication and are subject to change without notice. P&M Corporate Finance, LLC undertakes no obligation to notify any recipient of this market overview of any such change.

The charts and graphs used in this market overview have been compiled by P&M Corporate Finance, LLC solely for illustrative purposes. All charts are as of the date of issuance of this market overview, unless otherwise noted.

The PMCF Industrial Distribution Index may not be inclusive of all companies in the industrial distribution industry and is not a composite index of the industrial distribution industry sector returns. Index and sector returns are past performance which is not an indicator of future results.

This market overview is not directed to, or intended for distribution to, any person in any jurisdiction where such distribution would be contrary to law or regulation, or which would subject P&M Corporate Finance, LLC to licensing or registration requirements in such jurisdiction.

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