The news wave of Distribution Solutions Group’s March 31 announcement that it will acquire fellow industrial distributor Hisco is still reverberating throughout our audience. But now that a week has passed, I wanted to break down the additional details and insights that DSG shared about this deal in its follow-up investor call just hours after it alerted the masses.

With a potential total purchase price of $319 million, this deal may pale in comparison to Motion’s $1.3 billion acquisition of Kaman Distribution Group at the start of 2022, but it’s arguably the biggest one since then among industrial distributors. It combines the No. 34 and No. 38 companies on MDM’s 2022 Top Industrial Distributors List.

And while we’ve already covered the nuts and bolts of the DSG-Hisco acquisition based on what was shared in the press release for it, I wanted to break down this deal means in terms of what Chicago-based DSG will look like going forward and what the market impact is. DSG shared plenty of additional insights in its investor call about an hour after the press release went live, which I’ll summarize here.

But first, a quick snapshot of what DSG gains in Hisco:

Hisco at a Glance

• Hisco is a Houston-based distributor of specialty chemical and industrial products that serves the industrial technology market. 
• The employee-owned company had 2022 sales in excess of $400 million for its fiscal year that ended Oct. 31. (Along with adjusted EBITDA of about $29 million.) 
• Hisco has 38 branches and approximately 600 employees.
• Value added services: Custom fabrication, packaging/labeling, cold/clean room storage, vendor-managed inventory, precision slitting, die cutting, labeling/printing, prototyping
• Largest suppliers: 3M, alpha, Atlas Copco, Brady, Desco, Elkem, Henkel (via Loctite), ITW (via Chemtronics)

Here is Hisco’s product breakdown, per DSG:

Transaction at a Glance

Here are the transaction figures that DSG shared early on March 31 in announcing the deal:

• DSG will pay $261.1 million for Hisco at closing, with a potential additional payment of up to $12.6 million. DSG will also pay $37.5 million in cash or DSG stock in retention bonuses to certain Hisco employees that stay with Hisco or its affiliates for at least a full year after the deal’s closing, which is expected to happen by the end of 2023’s second quarter.
• DSG is financing the transaction at closing via a committed expansion of the company’s existing credit facility, plus approximately $100 million of equity rights offering to existing shareholders.
• DSG plans to combine the operations of its TestEquity unit with Hisco to create one of the largest distributors serving the electronics design, production and repair industries.
• The addition is expected to be accretive on an adjusted basis in 2023.

And, just as a refresher and as detailed in Associate Editor Mark Powell’s March 22 Premium piece examining DSG as it stood a year after its formation, DSG was the result of the merger of distributors Lawson Products, TestEquity and GexPro Services, which was announced on April 1, 2022 — a year and one day before the Hisco news. 

• Lawson is an MRO and automotive parts distributor. Its 2022 revenue was $429.7 million, up 15.6% vs. 2021.
• TestEquity is a distributor of electronic test and measurement equipment and solutions, electronic production supplies and tool kits that support the technology, defense, automotive, electronics, education and medical industries. Its 2022 revenue was $392.4 million, up 48.5% vs. 2021.
• GexPro Services is a provider of global supply chain services and C-parts to OEM and aftermarket customers. It specializes in the development of mission-critical production line management, aftermarket and field installation programs. Its 2022 revenue was $385.3 million, up 50.4% vs. 2021.

Those three fairly equally-sized legs combined for $1.27 billion in DSG’s total 2022 revenue, up 35.3% vs. 2021 on a combined basis and vs. how those three units previously performed individually. DSG had approximately $123 million in 2022 EBITDA.

So, what will DSG look like once the Hisco transaction is complete?

Distribution Solutions Group: A $1.7 Billion Industrial Distributor Going Forward

In its investor presentation, DSG said adding Hisco gives the combined company approximately $1.7 billion in 2022 revenue. That will likely place the company at around the No. 22 mark on MDM’s 2023 Top Industrial Distributors list, which will debut in June alongside 16 other lists ranking distributors across numerous industry verticals.

The resulting company’s combined 2022 EBITDA was approximately $158 million.

DSG President and CEO J. Bryan King said his company had been eyeing an entry into the industry technology for the past five years and that DSG has “known and followed Hisco’s success for many more years.”

“We believe that its (Hisco) highly complementary fit with TestEquity will greatly enhance the competitive position of our industrial technology vertical under Russ’ (TestEquity CEO Russ Frazee) leadership,” King said.

King noted that DSG is buying Hisco at an initial purchase price of 9.4x EBITDA, which DSG believes will be under 6x EBITDA within the first two-and-a-half years after closing. He supported this by pointing to the performance of DSG’s past five acquisitions, for which the purchase multiple was a combined 7.7x EBITDA and dropped to 6.2x within a year.

While DSG stated that it plans to essentially combine Hisco with the company’s TestEquity unit, Lawson Products and GexPro Services will also see benefits from it.

Impact on TestEquity

Once the deal is completed, TestEquity/Hisco is expected to comprise approximately 48% of DSG’s total revenue. DSG describes the combined unit as a “leading supplier of electronic & speciality production supplies and test & measurement equipment across OEM and MRO markets.”

The majority of Hisco’s revenue is comprised of consumable products that end up in a bill of materials. King noted that its addition means the reconstituted Test Equity-Hisco unit will be two-thirds weighted towards “reoccurring sticky, less capital-focused production supply products and value-added manufacturing.” 

Impact on Lawson Products

Upon the closing of Hisco, Lawson Products is expected to comprise approximately 29% of DSG’s total revenue.

King acknowledged that Lawson Products’ broadline industrial supplies portfolio significantly overlap with Hisco customers that are looking for fasteners and cutting tools.

“We believe (Lawson Products CEO Cesar Lanuza) and the Lawson team have a new pipeline of customers within the 10,000 customers in Hisco serves, and a significant untapped pipeline of opportunity in Mexico,” King said.  “Our desire with Hisco was to secure a leadership position for DSG in adhesives and solder, which we believe are growing with many of our customers at a faster rate than our established strong market position in fasteners are.”

Impact on GexPro Services

On the GexPro Services side, the unit is expected to comprise approximately 23% of DSG’s total revenue once Hisco is aboard.

King said DSG believes Hisco’s packaging, repackaging and labeling capabilities mesh well what GexPro Services currently offers.

More DSG Expansion on the Horizon

While Hisco represents a landmark addition for DSG, we can expect more expansion news out of the company going forward. CFO Ron Knutson closed the presentation portion of the company’s investor call by noting that, prior to Hisco, the DSG platform had acquired 13 businesses since 2017, including five in 2022.

“With the expansion of our credit facility and the expected equity raise, this puts us at a very comfortable leverage position post-close, giving us ample firepower to continue our acquisition strategy as the right opportunities present themselves,” he said.