Q4 INDUSTRY UPDATE
KEY TRANSACTIONS AND TRENDS
While certain specialty distribution sectors, such as electronics distribution, are dominated by large players, the chemical distribution sector is in the early stages of consolidation and has a long way to go. According to Robert Mosel, senior vice president at Brenntag, the top worldwide chemical distributor, “It is still a highly fragmented market with huge opportunities for consolidation.” Only five years ago, there were no publicly traded chemical distributors. Today there are four. However, the decline in crude oil prices has driven down chemical prices, creating difficulty for companies to grow aggressively organically. Instead, they have been turning to acquisitions to drive growth.
In the second half of 2016 alone, Brenntag announced three acquisitions:
- 10/27/16 – Specialty chemicals distribution business of EPChem in Asia Pacific
- 10/13/16 – Lubricants business of NOCO Inc. in northeast U.S.
- 9/9/16 – Lubricants business of Mayes County Petroleum Products in North America
Like Mosel, we expect acquisitions to continue in this highly fragmented sector.
Building supply distribution is another segment demonstrating strong M&A activity. Beacon Roofing Supply had third quarter sales of over $1B for the first time ever, with 60% of the increase due primarily to acquisitions. In the fourth quarter, ABC Supply finalized its acquisition of L&W Supply from USG (US Gypsum) for $670MM, combining two of the largest building material distributors in the U.S., and announced the acquisitions of Trumbull Vinyl Products and Ace Aluminum Distributors. As of November 1, 2016, ABC Supply had annual sales of over $8B and more than 700 locations in 49 states, increasing from less than $6B in sales for 2015.
SRS Distribution, which has been backed by Berkshire Partners since 2013, grew to $1B revenues in six years and actively used available cash to make purchases while the market was down. SRS’s 2016 transactions included Metro Roofing Supplies, Tri State Aluminum Products, MidSouth Building Supply, National Building & Roofing Supplies, Monroe Aluminum Products and Atlantic Roofing Distributors. The company has indicated that it continues to make acquisitions a high priority while it grows organically and through greenfielding.
Q3 INDUSTRY UPDATE
Omnichannel sales are making the leap from retail consumers to B2B buyers. With this trend, distributors are starting to prepare for an acceleration in online purchases. Consumers will have more access to information and improved processes through e-commerce and mobile apps, while companies will be able to use the technology and data for supply-chain optimization, operational efficiency and data analytics.
Forrester Research estimates that online B2B sales grew from $559 billion in 2013 to approximately $780 billion in 2015, which represents nearly 40% growth in two years, and online sales are expected to surpass $1.1 trillion by 2020.
Watsco, one of the largest HVAC distributors in the U.S., has stated a long-term goal to operate the most innovative suite of technology in the industry. Watsco has built a digitalized catalog of over 300,000 SKUs and mobile apps, and has utilized technology to improve inventory turns, reduce infrastructure costs and optimize fulfillment.
In addition to enterprise computing and e-commerce, the Internet of Things (IoT) is growing in the distribution sector. The number of IoT-connected devices is expected to surpass 50 billion by 2020. IoT can assist distributors in increasing the quality of their relationships with customers by, for example, embedding sensors in equipment to better understand customer usage.
Avnet certainly seems to buy in to this growth in IoT. The company divested its technology solutions operation group (to Tech Data Corporation) to renew its focus on components in new technologies, including IoT. The technology solutions group comprised nearly 40% of Avnet’s revenues in FY 2016, indicating a huge bet on new technologies and a willingness to potentially give up its spot as the number one electronics distributor to Arrow Electronics as it focuses on future strategy.
Key M&A Transactions
In Q3, several large companies experienced top line softness, leading to less specialty distribution M&A activity. However, transaction activity remained strong in the electrical distribution space.
Several large strategic companies made acquisitions, primarily to increase geographic presence.
North Dakota-based Border States Electrical acquired Shealy Electrical wholesalers in order to enter new geographic areas in the southeast U.S. Graybar, an employee-owned St. Louis-based distributor of electrical, communications and data-networking products and provider of related supply-chain management and logistics services, acquired Cape Electrical Supply, which distributes electrical wholesale products to commercial, residential and industrial markets and assists those markets with on-site management. The acquisition complements Graybar’s branch network by filling in locations that were not previously served.
NEW INDUSTRY OF FOCUS
This quarter we are pleased to introduce our Specialty Distribution Report to our line of quarterly industry reports. It is imperative for companies to make long-term investments in distribution infrastructure, so we will aim to keep you up-to-date on the latest M&A activity and trends in this space.
Q2 Industry Overview
Specialty Distribution long has been dominated by extremely fragmented, distinct industry segments, making it difficult for players to grow organically. Companies that have found success focus on vertical differentiation and creating and maintaining efficient operations. Larger companies have turned toward acquisitions to add the industry segment expertise of smaller niche companies to drive growth.
Within the middle market, successful firms generally are focused on being the best in their individual categories and/or regions. Smaller players can thrive in their respective market segments with superior customer service. Through acquisitions, larger companies with scalable platforms can leverage their infrastructure and technologies and apply the framework and resources needed to benefit from cost synergies and from the market experience of smaller niche players.
In order to succeed in a market that is reliant on macroeconomic trends, companies can focus on the tangible elements that are within their control, such as optimizing operations and implementing the necessary infrastructure for scalable digitized growth.
New digital tools and developments in category, supply chain and inventory management are increasingly accessible on a cost effective basis to companies of all sizes…
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