Great M&A articles

A couple of great articles about the state of M&A in the wholesale distribution sector following the sale of HD Supply to a consortium of private equity firms. Adam Fein's post asks - is M&A peaking in this sector? I think the bigger question is whether or not the overall M&A market is peaking? I for one still believe that many private equity groups are just coming around to the idea of wholesale distributors as an attractive sector. That being said as long as private equity firms and strategic buyers continue to have cheap access to capital I think the pace of M&A will continue on the macro level and may intensify within the wholesale distribution sector.

http://www.mdm.com/stories/ma3710.html

http://www.mdm.com/issues/blog/general/4184-1.html

http://www.distributiontrends.com/2007/06/is-m-peaking.html

MRO Supply Fund - A good investment?

This year publicly traded MRO supply companies are up significantly againts the S&P 500 and Dow Industrial averages. Grainger, Fastenal, MSC, and Watsco collectively are up 24.73% YTD compared to 5.94% and 7.20% for the S&P 500 and Dow Industrials respectively. Part of the reason I started this blog is because I think the MRO supply business is a great sector to invest in. I plan to periodically post updates regarding the performance of what I call the MRO Supply Fund (Grainger, Fastenal, MSC, and Watsco). I have also included a small table that tracks the return of these stocks relative to the S&P and Dow at the 1 year, 5 year, and 10 year intervals. Please let me know if you think I should include others companies to the MRO Supply Fund.

	YTD	1 Year	5 Years	10 Years	10,000 Investment after 10 years
GWW	31.46%	29.10%	91.81%	135.74%	23,574
FAST	16.50%	6.25%	116.18%	231.90%	33,190
MSM	33.32%	18.14%	169.21%	149.31%	24,931
WSO	17.67%	-5.12%	207.13%	229.69%	32,969
MRO Fund	24.73%	12.09%	146.08%	186.66%	28,666
S&P 500	5.94%	20.05%	51.79%	21.75%	12,175
Dow Industrials	7.20%	21.30%	66.59%	27.64%	12,764

Home Depot Sells HD Supply - one dumb idea

Home Depot finally pulled the trigger and sold HD Supply to a group of private equity investors for $10.3 Billion. Wall Street may be happy with the decision as they believe that the battered HD can now focus on their retail business. The fact of the matter is that their retail business only has limited growth in the United States as they are beginning to duplicate stores within regional markets - they are clearly nearing saturation in the retail home improvement business.

I was a big fan of Home Depot when they purchased Hughes Supply, the maintsay of their HD Supply franchise. I believed that Home Depot had the name and the know how to build a great MRO/Contractor supply business that could compete with Grainger in the highly fractured $145 billion MRO North American marketplace. However - the HD Supply business has been on the auction block for sometime now as the result of pressure from the street to raise the lagging HD share price.

All I can say is kudos to Bain Capital LLC, Carlyle Group and Clayton Dubilier & Rice - this is solid investment on their part and one that is sure to grow in the coming years. As for HD - if you haven't dumped this stock yet please do so. HD has sold their only growth business...

What percentage of Grainger's revenue growth is domestic? - 8% sales increase in May.

Grainger announced today that their daily sales had increased 8% in May from a year prior. Grainger's sales figures have often be a good indicator for economic activity in the United States given the company's large customer base and broad product offering.

More recently Grainger has made significant investments in foreign markets such as China and Mexico. In the first quarter Grainger indicated that revenues at their Mexican locations had increased 19.5%. It would be interesting to see how much of May's 8% growth was tied to growing business in China and Mexico.

Selling DC space,expertise, and manpower - Sold on eBay, Shipped by Amazon.com

A New York Times article from a few months back caught my attention. The article details Amazon.com's efforts to sell distribution services to small businesses. In short, a small company can warehouse material in Amazon's distribution center(DC) where the material is stored until the time of order. When the small business receives an order Amazon.com ships the material directly to the end user thus eliminating or greatly reducing warehousing and distribution expenses for the small business. Amazon.com's idea of selling distribution services is an interesting idea and extension of their concept of selling web services such as data storage.

Do you think CDW, Grainger, or Henry Schein could sell their excess distribution center capacity to small businesses? If they had the capacity would the margins of the business be worth their time?

Recent Acquistions by B2B distributors

Grainger acquires McFeely's Square Drive Screws

Grainger announced that the McFeely brand will be marketed under their Lab Safety Supply umbrella, a Grainger subsidiary. Any thoughts as to why this wood screw manufacturer is not being integrated into the core Grainger brand?

Henry Schein acquires Becker-Parkin Dental Supply furthering their dominance in the niche dental supply market.

M&A and B2B Distribution

In the last two years mergers and acquisitions announcements have dominated the business news, as a wide array of private equity groups and strategic players have snapped up companies. Despite the feverish pitch of today's M&A activity I believe that significant consolidation is still on the horizon in the MRO supply and distribution sectors.

Grainger's (GWW) President and COO Jim Ryan recently told a group of analysts that Grainger is poised to take a greater share of the $145 billion MRO market in North America. Grainger is the current market leader in the industry with only 4% of the market share ($5.9 billion in revenues in '06). Given the fragmented nature of the MRO market it is likely that a good deal of Grainger's growth will come through acquisitions. However, with attractive gross profits margins ranging between 40-46% for large MRO distributors (Grainger,MSC, McMaster-Carr) Grainger will likely be competing with other strategic and institutional investors for potential acquisition targets.

This blog will follow M&A activity within the the B2B distribution sector. Additionally the blog will follow interesting trends in distribution, supply chain management, and manufacturing. I welcome your comments and hope to foster a constructive dialogue about this unique market sector.