1. Distributor Acquisitions Hit Record Pace.
This year may go down as the most active ever for distributor acquisitions, both by number and in terms of the combined sales volume of the acquired companies. The editors of Electrical Wholesaling and Electrical Marketing newsletter have compiled a list of more than 30 distributors of electrical supplies that were acquired in 2006 (see table, page 25). That total is notably higher than the most active acquisition years of the late 1990s, when these publications reported on up to 20 deals per year. When the U.S economy is sound, construction is booming, private-equity funding is plentiful and potential suitors are scrambling to build new regional or national distribution platforms, it’s a "perfect storm" for business owners, because they can often demand a premium for their businesses.
The last time these factors came into alignment was probably during the acquisition craze of the 1990s, but the electrical industry didn’t see deals of this size back then. The sheer size of the consummated 2006 deals is staggering. Home Depot Supply, Atlanta; Rexel Inc., Dallas; Sonepar USA, Philadelphia; WESCO Distribution Inc., Pittsburgh; and U.S. Electrical Services Inc. (USESI), Exton, Pa.; all acquired sizable electrical distributors ranked on EW’s most recent Top 200. These five distributors bought 10 Top 200 distributors. The companies they acquired had a combined 2005 sales volume of more than $5 billion. That’s "billion" with a "B"!
What will the acquisition climate be like in 2007? Assuming the economy and construction markets perform as expected and private-equity funding remains plentiful, look for another banner year in distributor acquisitions. Acquisitions remain a key element of the growth strategies for the largest acquirers, and Home Depot Supply’s move into the distribution world this year has upped the ante on the pricing of the deals.
Don’t be surprised if another new player from outside the electrical business makes headlines with a big acquisition in 2007. Speculation continues that Wolseley plc, Reading, England, the world’s largest distributor in the commercial/residential/industrial space, would love to add to its plumbing and building supply distribution businesses in North America with the acquisitions of large electrical distributors. Wolseley had $21.5 billion in 2005 sales and 70,000 people working in more than 4,200 branches in 14 countries. Its building products distributor, Stock Building Supply, Raleigh, N.C., had $4.1 billion in 2005 revenue and 307 locations in 33 states. In the plumbing market, Ferguson Enterprises, Newport News, Va., had $7.1 billion in 2005 revenue and 1,100 branches in North America. Wolseley bought several distributors in the plumbing and building markets this year and its 10 2006 North American acquisitions are expected to add approximately $765 million to Wolseley’s global sales.
There’s also always the chance a new distribution entity will enter the market with the strategy of selling lower cost products from electrical manufacturers based in the Pacific Rim and other regions where low-cost manufacturing prevails.
2. Private-Equity Firms Court Distributors of All Stripes.
Directly related to this acquisition news is the continuing interest in the distribution world among major private-equity firms that back so many of the deals. In the electrical market, USESI is backed in large part by MSD Capital, the New York-based family office of Michael and Susan Dell of Dell Computer fame, and by Kelso, a 30-year-old private-equity company based in New York. Rexel is owned by a consortium of global private-equity giants, Clayton, Dubilier & Rice Inc. (CD&R), French investment firm Eurazeo, and Merrill Lynch Global Private Equity. At yearend, speculation raged that after a big year building out its Home Depot Supply distribution platform, Home Depot itself might be acquired for approximately $100 billion by two private-equity firms, Kohlberg Kravis Roberts & Co. (KKR) and Texas Pacific Group.
While the electrical wholesaling industry now seems to be attracting more private equity than most other distribution businesses in nearby market segments, it’s far from the only distribution market attracting interest. In fact, according to a study by Brown, Gibbons, Lang & Co., a Cleveland-based private-equity firm, in 2005 acquirers bought more than $45 billion in distribution revenues through acquisition. According to Adam Fein, president,
Pembroke Consulting, Philadelphia, in 2006 financial buyers such as private-equity funds were looking to invest approximately $100 billion of uninvested capital in the wholesale distribution market – that’s at least $400 billion in buying power at current leverage multiples.
The interest of private equity funds in the distribution industry waxes and wanes. When interest rates are comparatively low and money is accessible, they storm into the market. They see many of the distribution market’s niche industries as fragmented and are more than ready to fund the consolidation. But when the market sours, interest rates increase and funding becomes more expensive, they head for the door.
3. Record Copper Prices Pound the Electrical Market (Again).
Is anyone ready to predict where copper prices are headed in 2007? It’s a dangerous game best left to the experts. In November 2006, copper prices averaged $3.26 per pound, according to Metals Week. That’s up more than one dollar per pound from last year at this time and up $1.77 per pound from December 2004. These prices are astronomically high in a market that historically fluctuates in the 80 cents per pound to $1.20 per pound range
John Mothersole, principal of industry practices, Global Insight, Waltham, Mass., follows the fluctuations in building materials costs closer than anyone. If you need information on pricing trends in copper, steel rebar, aluminum, lumber, plywood, asphalt, cement and other building materials, he’s your man. Mothersole says over the past year he has gotten more questions about the cost of copper than any other building material. At the 2007 McGraw-Hill
Construction Forecast, held in Washington, D.C., in late October, he said the fundamentals of supply and demand are stabilizing in the copper market. While he wouldn’t rule out more increases for this pricey metal in 2007, he does expect any increase to be less dramatic than those we’ve seen in the last two years.
4. Home Depot Supply Buys Into Electrical Industry.
While Rexel purchased more electrical sales than Home Depot Supply in 2006, and Sonepar and USESI finalized more acquisitions this year, Big Orange made the biggest splash. When the company bought Hughes Supply Inc., Orlando, and Edson Electric Supply, the announcements hit the electrical wholesaling industry like an $81 billion dollar cannonball in a backyard pool party. With a parent company ringing up that kind of sales and Home Depot Supply’s own aspirations to be a $23 billion to $28 billion player in the distribution market by 2010, we haven’t heard the last of the Home Depot Supply name in this market.
5. Global Sourcing of Electrical Products Takes Center Stage.
The next big storm to hit the electrical market will be an all-industry debate over the branding of products. While manufacturers have sourced products from low-cost global manufacturing locations for more than 20 years, the debate over the labeling of these products is just starting to take form. While manufacturers used to be the only ones playing the global sourcing game, electrical distributors and even reps are now inking global manufacturing deals and labeling these products with their own brand names. It’s a trend that challenges the brands of traditional electrical manufacturers.
Electrical Wholesaling recently found itself in the middle of a marketing furor related to global sourcing when its October issue arrived in subscribers’ mailboxes "polybagged" with an insert that included lowball pricing from an importer of electrical products. While it was a mistake on our part to run display advertising with pricing, the amount of money this company was willing to spend to establish itself in the United States as a low-cost provider of electrical products was astounding. Love or hate the idea, it won’t be the last time a global importer uses this approach. To protect their brands, traditional manufacturers will have to do more to differentiate their packages of products and services from those of new offshore competitors that focus on low pricing.
6. Housing Market Hits the Wall.
What goes up must come down. After a joy ride that lasted several years and set residential construction records year after year, the housing market blew a few tires and left homebuilders holding tens of thousands of unsold, empty new homes in many of the same markets that provided so much of the excitement. The lonesome echo of overbuilding can be heard throughout the streets of new housing developments in overheated metropolitan areas in Florida, Arizona, Las Vegas, Southern California and other parts of the Sunbelt. The crash hurts the many businesses that depend on the housing market, and it will take at least a year for builders to sell existing inventory and for prices to drop in many markets to the point where people can actually afford to buy homes again. But it’s all part of the game in the housing market, where cyclical swings are common. Economists are already predicting that a rebound will begin in 2008.
7. Commercial Construction to Sustain Industry Growth in 2007.
While the housing market got hammered in 2006, commercial construction enjoyed one of its best years in quite some time. National office-vacancy rates are at their lowest point in years, and the light-commercial construction that tends to lag housing spurts is well underway in what were the most active housing markets. One of the beauties of the electrical wholesaling industry is the balance it enjoys between major market segments. The three biggest segments – residential, commercial and industrial construction – all march to the beat of their own drums, with their own market drivers. They are all interrelated, in that residential work leads commercial work and industrial work tends to follow the other segments. But it’s pretty rare for these three segments to be going great guns or in a down cycle at the same time. While the residential market helped lead the electrical industry through the early parts of this economic recovery earlier in the decade, it’s the commercial market, and to a lesser degree the industrial market, that will sustain growth next year.
8. Energy Market Gathers Momentum.
The market drivers that create demand for energy-saving electrical products became an increasingly visible factor in the electrical industry in 2006. Utility-rebate programs are very much alive and are a valuable marketing tool distributors, contractors and other industry buying influences can use to stimulate sales of energy-efficient lamps, ballasts, lighting controls, reflectors, lighting fixtures, motors and drives. The tax breaks the federal energy bill offers for the design of energy efficient buildings are a tangible resource building owners can tap into. The LEED design standards promoting the development of "green" buildings are now producing healthier workplaces that help the environment. Consider the ever-more efficient lighting products that hit the electrical market in greater numbers every year. Electrical manufacturers, electrical distributors and independent manufacturers’ reps can use the momentum these market drivers have created to overcome the cost-first focus that stymied sales of energy efficient electrical products in the past.
9. March Continues Toward a More Digital Future for the Electrical Biz.
It has taken several years for The Industry Data Exchange Association (IDEA), Arlington, Va., to convince distributors and manufacturers they can enhance profitability, data accuracy and transaction efficiency by using its package of online services. But IDEA is gaining some real momentum, as more distributors, manufacturers and reps discover the benefits of transmitting data through the IDX2 value-added network (VAN), managing data through the IDW2 industry data warehouse (IDW), and synchronizing and cleansing data through the Data Audit and Certification (DAC) process.
10. Who’s Who at the Zoo: Industry Execs on the Move.
Several manufacturers made some major promotions in the executive teams. At Fluke Corp., Everett, Wash., Barbara Hulit was named president, with responsibility for Fluke Industrial and Fluke Precision Measurement. At Milbank Manufacturing, Kansas City, Mo., Lavon Winkler was promoted to president and chief executive officer and Bruce Bittner joined the company as vice president of sales and marketing. Jeff Seagle was appointed president of Stahlin Non-Metallic Enclosures, Belding, Mich.; Paul Suzio became president and chief operating officer of Bridgeport Fittings Inc., Stratford, Conn.; and Mark Hammer is now president of Homac Manufacturing Co., Ormand Beach, Fla. Other senior appointments included Jim Hlavacek’s promotion to president of Minerallac/Cully, Addison, Ill., succeeding John Alton, who retired; Scott Dysert’s move to president of Liebert North America, Columbus, Ga.; and the promotions at Schneider Electric USA, Palatine, Ill., where Christopher Curtis was named president and Jason Klann was promoted to senior vice president, business development and strategy.
The lighting industry saw plenty of changes in the senior management ranks. At Shat-R-Shield, Salisbury, N.C., Karen Ponce, a 16-year company veteran, was appointed president and Marty Pint joined the company as vice president of sales and marketing; Tracy Bilbrough became president and chief executive officer of Quality Home Brands, New York; Amelia Huntington was named president and chief executive officer of Juno Lighting Group, Des Plaines, Ill.; K.R. den Dass was appointed president of Philips Lighting Co. North America; and Neil Schrimsher was appointed president of Cooper Lighting, Peachtree City, Ga.
In other lighting news, at Lutron Electronics Co., Coopersburg, Pa., David Weinstein was appointed to sales vice-president market development; at Acuity Brands Inc., Atlanta, Crawford Lipsey was promoted to executive vice president and general manager for the company’s Solutions Group and John Hartman is now leading the company’s Commercial Group; George Gilson became national sales manager of Litetronics International, Alsip, Ill.; and Fred Engel was named president of the U.S. distribution division of SLI Lighting, Mullins, S.C.
In other manufacturer news, Stan Mickens was promoted to vice president and general manager of the electrical components division of Eaton Corp., Pittsburgh; Stephen Colvin was appointed vice president of marketing for Ferraz Shawmut, Newburyport, Mass.; and Stephen Schoffstall was named vice president of marketing for On-Q/Legrand, Harrisburg, Pa. At Cooper Industries, Houston, James Pendley is now chief marketing officer and David Pawl is now vice president of operations.
Additional executive changes included Liz O’Grady’s promotion to national sales manager for the electrical and telecommunication markets at Carlon, Cleveland; Martha Kness’ promotion to vice president of marketing for Greenlee, Rockford, Ill.; and Dave Griffith’s move to vice president sales and marketing for networked solutions, at GE Security, Bradenton, Fla. At Affiliated Distributors, King of Prussia, Pa., Sean Kenny is now director of member relations and Kim Wanamaker is vice president of marketing.
Distributors were fine-tuning their senior management teams, too. Bruce Gray was appointed vice president and chief financial officer at Independent Electric Supply, Somerville, Mass.; Neil Gillespie was named vice president of marketing and strategic development for Roden Electrical Supply Co., Knoxville, Tenn.; Drew Ott joined Summit Electric Supply, Albuquerque, N.M., as vice president of sales; and Mike Smith is now senior vice president and chief operating officer of OneSource Distributors, Oceanside, Calif.
In other distributor news, James Ryan was promoted to president of W.W. Grainger, Lake Forest, Ill.; Sam Hunt IV became president of Hunt Electric Supply, Burlington, N.C.; Greg Losey joined Wiseway Supply, Florence, Ky., as electrical division manager; Matthew Eddleman was promoted to vice president-Southwest region for Border States, Fargo, N.D.; and Kenneth Vairo was named senior vice president of construction sales for Munro Electric, Fall River, Mass. At Brook Electrical Distribution/Sonepar, Chicago, Mike Wall was appointed president and Michael Nuccio was promoted to chief operating officer and chief financial officer.
At US Electrical Services, Greg Griswold was named president of the Mid-Atlantic region; Carl Brand was appointed president of the New England division; and John Reznick became president of Electrical Wholesalers, Hartford, Conn. Also at USESI, Randy Moore was appointed president of the Florida region, Ellis Thompson was named president of the company’s Southeast region, and John Marshall became regional vice president for the company’s Washington, D.C., Virginia and Maryland region.
In other news, Larry Robinson became executive vice president of the Kansas City-based rep firm, Cleaves-Bessmer- Marietti; Ray Kernagis was named supply chain vice president for Johnstone Supply, Portland, Ore.; and Paul Koebbe was named national market manager-security for Graybar Electric Co., St. Louis.