The beginning of 2022 has been a whirlwind for distribution M&A. Several prominent industrial distributors have announced that they will be acquiring other large companies – turning some into billion-dollar businesses. Lawson Products will be merging with Gexpro Services and Test Equity; Motion Industries will be acquiring Kaman Distribution; and White Cap will be acquiring Ram Tool.
All of these deals will have a significant impact on the distribution space. On a recent episode of Wholesale Change, Ian Heller and Jonathan Bein talked about these deals, the synergies between the businesses, and their predictions for the rest of 2022. Here’s an excerpt from their conversation.
Ian Heller: Lawson Products is acquiring Gexpro Services, a supply chain solutions provider, and Test Equity, which sells test equipment. We’ll talk about that for a while, then about the Motion and Kaman deal and briefly about White Cap and Ram Tool.
Jonathan Bein: None of these deals is acquiring another branch or two branches. These are all really significant deals, and it’s a little bit unusual to have this many significant deals in such a short period of time, right?
Heller: That’s right. This all happened at the end of 2021, but I think it is a sign that there’s going to be a lot of M&A activity in 2022. Let’s jump into the Lawson deal first because it’s really complex.
So, Lawson released the financials for the two private companies, Test Equity and Gexpro Services, as part of the deal. Through the first three quarters of 2021, Test Equity had done about $209 million in revenues. They lost about $4 million. They’ve been losing money for the last two or three years based on information in the deal book. Gexpro Services is a little bigger. They did $247 million through the first nine months and made about $11.6 million. Lawson did about $316 million in revenues and made $10 million.
The combined company, through the first nine months of 2021, did $772 million in sales. So they’re saying it’s going to be a billion-dollar company in revenues when it’s over. Now, this is an unusual deal because these companies don’t appear to me to have a lot of customer synergies.
Bein: That’s how it looks at first blush. If you peel back the Test Equity history there, they’ve done a number of acquisitions on the testing and MRO sides of the business. There were synergies between those two parts, but now they are seemingly more disparate.
Heller: In their press release, they spoke to some synergies. The combined entity will have a balanced mix of production, OEM and MRO serving a combined 120,000 long-standing customers. Lawson has 90,000, Test Equity has 30,000 and Gexpro has around 1,800 large customers. They have the ability to enhance long-term organic growth rates by offering more products and services to each company’s customers. So they’re claiming four kinds of synergies here or four advantages. One is marketing, and one is that they can cross-sell.
Bein: It’s hard, though, because this means if you’ve got a salesperson who knows about fasteners, he or she now needs to know about selling testing products or a certain class of production supply products. The knowledge transfer required to get that cross-selling synergy is harder than with branches.
Heller: Right, eliminating redundancies is more straightforward and lower risk than cross-selling. But, to your point, it’s hard to get some of those sales synergies. I’m not implying that they’re overestimating, but they still have to go through the hard work of getting it right.
The third area where they talk about synergies is on the purchasing side. They can enhance product sourcing opportunities, including private label opportunities, while expanding channels to market. Although, I don’t think these companies have a lot of crossover in their product mix.
The fourth area is their ability to leverage best practices, back-office resources and technology across the platform to drive operating efficiencies. And, they do talk about how Lawson will benefit from the ecommerce capabilities that Test Equity has. This is your classic redundancy elimination type of synergies. My personal view is that the combination of balance sheets into a holding company is the most compelling of these and would appear to have the most value.
Bein: Right, and now as a billion-dollar player, they’re a different scale of a company.
Heller: Let’s talk about the Kaman and Motion deal.
Bein: Terrific. When you put the two of them together, the predictions show just under $8 billion revenue, $815 million EBITDA and about 10.5% percent EBITDA post-merger. It will make them the second-largest industrial distributor in North America, trailing only Grainger. So, this is a significant move for Motion.
If we look at Motion’s history on acquisitions, they’ve done three, five, maybe six a year on average over the last decade. Most of those acquisitions were small, maybe $15, $20, $50 million. They tended to acquire smaller properties as part of their acquisition strategy, so this is a really significant move. You have the largest player getting even larger.
Here are some ways to think about this particular deal in terms of synergies. First, they’re looking at branch redundancy, so there will be branch reduction. They’re also looking at supplier overlap where they can get significantly more buying power from those suppliers. Then they’re looking at the customer overlap.
One thing mentioned in the analyst calls was that no single customer of either company represents more than 10% of the deal. So, there are a lot of smaller accounts where they have an opportunity to cross-sell and cross-fertilize. They expect that by optimizing the branch network, consolidating standalone branches and product distribution networks, accelerating growth with sales and harmonizing the supplier and supply chain, they could be looking at a $50 million annualized synergy run rate.
Heller: It’s interesting; these are extremely value-added distributors if you look at all three of these deals. I think investors realize that these highly value-added distributors are much less exposed to disruption. I can’t wait to see how the Lawson deal works out. We don’t understand it very well, but the people doing it do.
Let’s pivot now and talk about White Cap and Ram Tool. White Cap has something like 400 branches, and Ram Tool has around 45. Although White Cap is close to 10 times bigger, these two were mortal enemies for a long time. They would hire each other’s employees and had lawsuits going back and forth. So, I was surprised to see this deal happen. Even though I think it makes a lot of sense strategically and financially, I felt that there would potentially be too much bad blood between them for it to happen. So, I’m glad they got over that.
White Cap is becoming far and away the largest supplier of concrete construction products – they dwarf everybody else in the space. White Cap acquiring Ram Tool is a straightforward deal. They’re going to pick up a bunch of business they didn’t have previously and can probably rationalize branch locations since they overlap in some markets. They’ll also pick up some experienced salespeople. Ram Tool has a big talent pool to add to the White Cap platform.
I think the purchasing synergies are obvious. This was probably a very straightforward deal in terms of valuation. There are significant redundancies that they can eliminate to take some costs out of the operation and add some supply chain procurement synergies.
Bigger companies get bigger multiples. So, in all three cases, you’re taking smaller companies and joining them to make larger companies. This means they’ll be inherently more valuable if they successfully execute the integrations.
Jonathan, do you expect this pace of M&A to continue through 2022?
Bein: I think the pace at the smaller end of the market will increase significantly because a certain resource is required to scale into this decade. A lot of it has to do with digital infrastructure and customer-facing infrastructure. Digital transformation is important, but smaller companies don’t have the resources to do it. If you look at the numbers required for a digital transformation, it could be up to $3 million. So if you’re a $20 or $30 million distributor, you can’t do it.
Then, COVID came along and accelerated the need for all of that by five years. If I were a mid-market distributor, I would be looking for companies with good expertise and a good customer base but who don’t have the resources to scale.
If you are the company that will be acquired, how do you position yourself so that you get the best valuation when the music stops? Then if you are the acquirer, how do you spot the companies you can bring value to in a creative way over the following 18 months?
Watch Ian and Jonathan’s full conversation:
Ian Heller is the Founder and Chief Strategist for Distribution Strategy Group. He has more than 30 years of experience executing marketing and e-business strategy in the wholesale distribution industry, starting as a truck unloader at a Grainger branch while in college. He’s since held executive roles at GE Capital, Corporate Express, Newark Electronics and HD Supply. Ian has written and spoken extensively on the impact of digital disruption on distributors, and would love to start that conversation with you, your team or group. Reach out today at firstname.lastname@example.org.