MAY 10, 2006: Distribution Channel Commentary (DCC) #88

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TOPICS:

  1. WHAT’S YOUR COMPANY WORTH? GET A FREE REPORT THAT WILL HELP!
  2. THE PRIVATE EQUITY BUBBLE THAT’S LIFTING VALUATIONS – LONGEVITY?
  3. PURCHASING.COM SURVEY; SELL REPLENISHMENT SYSTEMS, NOT PRODUCT.
  4. PROVOCATIVE ARTICLE ON RETHINKING A DISTRIBUTION BUSINESS AFTER PAYING A HIGH MULTIPLE FOR IT.
  1. WHAT’S YOUR COMPANY WORTH? GET A FREE REPORT THAT WILL HELP!

Since my last DCC, Boeing announced that it will buy the international, publicly traded distribution firm, Aviall, for $1.7B. Aviall’s latest annual sales were $1.3B and profits were $57MM. Boeing paid a big price for "strategic" reasons and also because their business has been very strong with cash piling up. Warren Buffet just announced a $4B acquisition, but he still has over $40B on the balance sheet of Berkshire Hathaway with which to shop.

What was the "EBITDA" multiple that Boeing paid for Aviall? Why ask? And what’s the formula? "Financial buyers" usually buy companies for a multiple of "earnings before interest and tax"(EBIT) plus non-cash expense items added back in – mostly depreciation (DA) – and then subtract the debt on the acquisition’s balance sheet – all together it’s called "X*EBITDA less debt". I checked in with Bill Welnhofer, the most focused-on-distributor-values guy that I know, to see if the Aviall deal set a new valuation record for distributor deals. Here’s his response:

"Confirming our conversations on Friday, the Home Depot price for Hughes was a 26% announced premium to the pre-deal trading value reflecting a LTM EV/EBITDA multiple of 12.03x (and 0.66x LTM revenue); the Boeing price for Aviall was a 29% announced premium to the pre-deal trading value reflecting a LTM EV/EBITDA multiple of 15.19x (and 1.54x LTM revenue). I suspect that the Aviall multiple deal will probably go down as the high water mark for this cycle – an outlier, in my view. Boeing is paying a princely sum for this business."

Bill has started cranking out an exhaustive, analytical report on the valuation of all publicly traded distribution companies along with trend charts and news feed updates. If you would like to learn more about what has been going on with distribution company valuations to then infer what your company is worth, just email Bill at the following email address. You can even copy and paste in the following note if you would like. If you need any extra help in valuing your company or planning to sell your company, that’s one of Bill’s services. His email address is: b.welnhofer@swandco.com

Bill,

Bruce Merrifield says your monthly distributor valuation newsletter is great. Would you please email me a copy and add me to your mailing list. Sincerely,

  1. THE PRIVATE EQUITY BUBBLE THAT’S LIFTING VALUATIONS – LONGEVITY?

In 2005, private equity firms that are intending to do leveraged buyouts this year, raised a record $100 Billion. The $100B will then be combined with 4 or more times the debt to do future deals. The fund-raising pace for 2006 is even greater than 2005. Last week, one of the mega-fund operators, KKR, announced a fund in which they plan to raise $5B through a first-time-ever, public offering up from an initial $1.5B total that they had previously announced. It appears that the fuel on the demand-side for doing deals will be very strong going into 2007, although valuation multiples could compress if the general markets turn down.

If you know someone who is considering either investing in a private equity fund or selling out to or working with a fund, then choose carefully. How can the monster funds put too much money to work in a wise, value-added way when big company targets are selling at very high stock or EBITDA multiples? And, when most of the easy-picking, quick turnaround or consolidation plays are gone from the medium and small company segments, which funds will be able to patiently roll up micro-cap firms? (Warning, here’s an ad coming!)

The reason that I ask these questions is that I have had the privilege to work with Bradford Equities over the past 20 years (http://www.bradfordequities.com). During this time, I have served on boards of some of the micro-cap roll-ups that they have done owned by a series of funds in both distribution and manufacturing industries. These guys know their niche, don’t raise too much in any given fund, and are very patient investor/partners who have made great returns through all markets. Check out their current portfolio of companies that includes some distribution plays in specialty plumbing, foodservice equipment, and others.

If any readers are considering being part of a micro-cap roll-up or looking for a fund to invest in (the next one will launch this fall), contact me or Rob Simon, BE’s senior partner.

  1. PURCHASING.COM SURVEY; SELL REPLENISHMENT SYSTEMS, NOT PRODUCT

On 5-4-06 purchasing.com posted their annual survey of big MRO buyers which is a must read for all distributors selling MRO goods. A few highlights:

  • Buyers are more price sensitive than last year, because their businesses can’t raise prices, so they don’t want to take them on the buy side. What a surprise? But, find out how the rest of the value variables changed too. And,
  • The value of "technical assistance" (read: reps proactively pushing products) has fallen to "1.9" on a scale from 1 to 10. Makes me wonder how well a marketing team, including traditional field sales reps, would do on a test about how to sell and install or take MRO demand replenishment systems to the next level(?). Here's the link: http://www.purchasing.com/index.asp?layout=articlePrint&articleID=CA6329321
  1. PROVOCATIVE ARTICLE ON RETHINKING A DISTRIBUTION BUSINESS AFTER PAYING A HIGH MULTIPLE FOR IT.

If someone pays what seems to be too high a price for a distribution business, then they will have to reinvent what the distributor has been doing and how it does its value-added jobs. For an article loaded with ideas that will raise tough questions for you to chew on, check out Scott Benfield’s latest at this link: http://www.benfieldconsulting.com/benfield_site/WhitePaper3.htm.

 

That’s all for this one; happy trails!

 

Bruce Merrifield

Bruce@merrifield.com