Clayton, Dubilier & Rice and The Sterling Group Create a New Industry Giant
If you want to see the future of distribution, look no further than yesterday’s announcement that private equity firms Clayton, Dubilier & Rice and The Sterling Group have combined two construction supply heavyweights under one roof – pending regulatory approval. CD&R is buying HD Supply Construction & Industrial – once and now again known as “White Cap.” The firm is combining White Cap with Sterling’s Construction Supply Group (CSG), which is made up of 17 regional distributors across the US and Canada.
CD&R will own 65% of the combined entity, and Sterling will own the rest. According to press releases, the combined transaction is worth about $4 billion, which roughly breaks out as $2.9 billion for White Cap and $1.1 billion for CSG.
These two companies are, by far, the largest distributors in the concrete construction supplies industry. Together, they enjoy more than $4 billion in annual sales through 400 branches to 265,000 customers and employ about 7,500 people. White Cap’s John Stegeman and Alan Sollenberger will serve as CEO and president, respectively, of the combined company, which no doubt means its headquarters will be in Atlanta instead of Denver, where CSG is located today. I expect the combined entity to be called White Cap.
I served as vice president of marketing for White Cap from 2010 to 2017, reporting to Stegeman. When I started, the company’s revenues were well under $900 million, and we were unprofitable. In 2019, the company reported sales of just over $3 billion with an EBITDA of 10.8% and the vast majority of that growth was organic. As you might guess, White Cap has an extraordinarily talented leadership team.
The Regulatory Challenge
No deal of this size goes unchallenged by competitors. The next-largest construction supplies distributor in the United States that is a direct competitor to the newly expanded White Cap is probably Ram Tool, a regional player headquartered in Birmingham, Ala. Ram operates 43 branches, mostly in the Gulf and Southeastern regions. Colony Hardware is another regional competitor with a geographic footprint of 36 branches covering the Northeast, Florida and Dallas/Ft. Worth.
If the FTC evaluates this deal by comparing it to other regional construction supplies distributors, it could pose problems for CD&R and Sterling. However, that is categorically the wrong way to look at this merger. The reality is that the entire distribution industry in the United States is entering a long period of disruption, and the drivers are outside entrants that are going to take massive amounts of share from incumbents that absolutely must consolidate to compete and, in some cases, to survive.
For example, Amazon doesn’t have to disclose the revenues of its subsidiary, Amazon Business, but Bank of America/Merrill Lynch estimates it will enjoy sales of $34 billion by 2023. RBC Capital (which provided financing to CD&R for the White Cap deal) estimates Amazon Business will reach $52 billion in sales that year and Applico – which has a history of forecasting revenues accurately – is estimating $75 billion.
But the disruptors also include Google Shopping, Walmart.com, Alibaba, eBay Business & Industrial and Home Depot. All of these players sell a large assortment of industrial and commercial construction supplies and are very likely to expand their offerings in the near future. These are some of the world’s largest and best-capitalized companies and they’re invading wholesale distribution, meaning consolidation is inevitable. If the FTC disapproves mergers like the White Cap-CSG deal, they are preventing incumbents from achieving the scale they need to defend their market share from these enormous and aggressive disruptors.
Synergies and Integration
Geographically, these companies are a good fit; as in all large deals, there is some overlap, but it’s pretty small considering the number of branches involved. White Cap will face the usual integration challenges ranging from IT systems to branding to combining cultures, but the leadership teams of the two companies have executed dozens of deals. I expect they will navigate this merger professionally and expeditiously.
A View into the Future
In my writing, keynotes and webinars, I’ve been forecasting increased consolidation as outside disruptors continue to invade wholesale distribution. The industry has been spared the waves of disruption that have rolled through retail, but now the barbarians are at the gates.
Distribution companies either need to focus on very tight niches that disruptors aren’t interested in, or they need to join forces and marshal the resources to thrive in a new era of competition. Customer expectations continue to rise for world-class supply chain capabilities, advanced technologies, wide assortments, deep inventories and top talent. Meeting these requirements takes enormous amounts of capital that are simply not available to smaller firms.
If you’re a distributor, keep an eye on White Cap, which – thanks to the help of CD&R and The Sterling Group – is modeling one of the only viable paths to a successful future. If you’re an investor, pay attention to the distributors who have a plan to lead through the disruption instead of following. If you’re a regulator, look at the challengers distributors are trying to fend off instead of smaller competitors, many of which won’t make it anyway if they don’t develop their own plans for consolidation.
Consolidation is coming. You can lead, follow or get out of the way but you cannot stop it. This merger reveals how aggressive companies plan to build the scale necessary to compete in the future, and I suggest you watch it closely to understand as you build your own long-term plans.