MERIDIAN CAPITAL OVERVIEW
Twice a year, Meridian Capital publishes its Diversified Industrials M&A Update, which focuses on key M&A trends in industrial distribution and manufacturing sectors. The Fall 2018 edition focuses on activity within value-add and specialty distribution sectors.
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WHAT IS DIVERSIFIED INDUSTRIALS?
OUR DIVERSIFIED INDUSTRIALS EXPERTISE
Specialty Distribution Focus for this Update
- Automotive Aftermarket
- Branded Wholesale
- Building Materials
- Food & Foodservice Distribution
- Industrial and Safety Distribution
- Medical and Dental Distribution
- Power and Electrical Distribution
- Transportation and Logistics
M&A MARKET MOMENTUM
Sustained macroeconomic momentum in the U.S. industrial markets has encouraged M&A activity. Macroeconomic indicators and key growth indexes continue to reflect positive market momentum. Strong purchasing manager confidence and industrial production output reflect a peak in industrial market confidence. Growth in durable goods orders continues to outpace shipments supporting continued economic expansion in the near term.
Middle Market Transactions Leverage Trend (Debt / EBITDA – All LBOs)
- EBITDA multiples (source: Pitchbook through to 9/30/2018). Average = 5.3x
A positive economic outlook and strong capital markets drove robust distribution M&A activity in 2018. Total deal value through mid November has exceeded $31 billion across more than 423 transactions. This transaction volume activity represents a 2% increase over the same period in 2017 and more than 25% above the trailing 10-year average.
U.S. Specialty Distribution M&A Activity
Last 10 Years; Number of transactions
- Corporate/Strategic M&A
- Private Equity
DIVERSIFIED INDUSTRIALS "SPECIALTY DISTRIBUTION" M&A TRENDS:
THE AMAZON EFFECT
- Amazon continues to pose a significant risk to distributors in B2B distribution markets. The online retail giant has set the market expectation for greater on-demand delivery and pricing transparency causing distributors to adjust their pricing strategies to be more competitive on off-the-shelf items. These shifts are impacting distributors’ gross margins, leading many businesses to seek growth through geographic or channel expansion in order to increase scale and combat margin compression. These market factors have created an active environment for M&A as distributors utilize acquisitions to enter new markets and expand market share.
- While Amazon has made strides in select B2B distribution markets, the company has faced challenges penetrating industrial OEM and MRO markets. One of the greatest barriers to entry in these markets is the rigorous OEM requirements for purchases of mission-critical machinery, components, or supplies that are technical or complex and require unique value-added services and customization.
- The higher the levels of service and customization, the more insulated a distribution sector will be from the impacts of the Amazon effect. Distributors are actively diversifying to combat this by developing dominant positions in niche end-markets, enhancing technical expertise and high-touch services, offering vendor-managed inventory, shifting customer conversations toward total cost of ownership, and ultimately participating in strategic M&A to build incremental differentiating capabilities.
AUTOMATION AND TECHNOLOGY ADOPTION
- Technology can be a source of significant competitive advantage for specialty distributors seeking to scale operations and improve margins. Recently the industry has experienced a rising trend toward implementing warehouse management software systems to increase fulfillment efficiency and drive speed through distribution networks. In response to rising labor costs, some distributors are investing in robotic systems, self-driving lifts, and other forms of automation. Distributors are also building ecommerce offerings to supplement their core businesses.
- Distributors with robust technology platforms can realize significant value through integrating smaller businesses onto their platforms. Some distributors are driving technology improvement by acquiring other companies that are further along on the technology adoption curve in order to leverage in-house technology expertise.
- As an example of this, in March 2018, Ficodis Group, a Quebec-based industrial supply distributor, acquired cutting tool supplier, Elite Tools. Through this acquisition, Ficodis is seeking to leverage Elite Tools’ strong online sales expertise and platform to improve its own ecommerce operations.
ACTIVE CONSOLIDATORS DRIVING PREMIUM VALUATIONS
- The continued availability of debt and equity capital has fueled active consolidation in a number of distribution sectors. In actively consolidating sectors, premium valuations are available for mature companies that represent attractive platforms for consolidation as well as for potential add-on acquisition targets with unique niches or leadership positions in key geographic markets. In sectors with multiple acquisitive players, premium values often come as a result of competitive bidding environments. These environments have, in some cases, yielded values above and beyond what may have been expected based on gross margin profile.
- The foodservice equipment and supplies (FE&S) industry represents a later stage consolidation environment in which the largest participants remain highly acquisitive backed by healthy balance sheets and well-funded private equity funds. The largest company in the sub-sector, Trimark, changed ownership last year when Warburg Pincus sold it’s position to Centerbridge Partners for a double digit, premium EBITDA multiple. Private equity investors continue to view Trimark as an attractive platform for incremental market consolidation driving this premium valuation.
- In another example of a consolidating market, M&A activity within the janitorial, cleaning, and paper product distribution sector has recently been accelerated by increased interest from several roll-up private equity groups, most notably Audax Private Equity. Since acquiring Imperial Dade in late 2016, Audax has made seven add-on acquisitions (four in 2018).
EXPANSION OF NATIONAL AND INTERNATIONAL FOOTPRINTS
- Increasing pressure from online competition, expensive long-distance freight costs, and a need to obtain market share in growing geographies has continued to motivate many distributors to expand their geographic footprints through M&A, both nationally and internationally.
- One of the most active examples of geographic footprint expansion in 2018 has taken place within the building and landscape supply subsector. SiteOne Landscape Supply (NYSE:SITE) has lead the sector, completing 12 acquisitions through November. SiteOne’s expansion initiative has included adding new distribution properties in Colorado, Florida, Washington, Virginia, Boston, East Texas, and several other attractive metropolitan areas.
- On the international front, auto aftermarket distributor LKQ (Nasdaq:LKQ) recently acquired Stahlgruber, a leading European wholesale distributor of aftermarket spare parts. The CEO of LKQ Europe said of the transaction, “Stahlgruber will create a contiguous footprint and serve as an additional strategic hub for our European operations, allowing for continued improvement in procurement, logistics and infrastructure optimization.”
SPECIALTY DISTRIBUTION SUBSECTORS VALUATION MATRIX
SPECIALTY DISTRIBUTION PERFORMANCE VALUATION TRENDS
M&A SELECT CASE STUDIES
“The model by which consumer and commercial goods are distributed in the U.S. has evolved significantly over the past decade. Future success will be heavily focused on a distributor’s ability to leverage technology, provide value-added services that create binding relationships, and establish geographic advantage.”
Brian Murphy, President & Managing Director