The first big deal of the year, Applied Industrial Technologies’ agreement to buy FCX Performance Inc., likely sets the tone for distribution M&A in 2018 – adjacency and building a more differentiated specialty capability as distributors evaluate exposure to Amazon and increasing threats posed by digital competition and commoditization.

Applied last week said it plans to acquire the Columbus, OH-based distributor of specialty process flow control products and services for 11.3x projected 12-month EBITDA. The deal is expected to close within 30 days.

Applied is No. 10 on MDM’s 2017 Top 40 Industrial Distributors list, with fiscal 2017 revenues (June 2017) of $2.6 billion. FCX is No. 30 on MDM's top industrial distributors list – and No. 4 on the Top 10 Fluid Power Distributors list – with 2016 revenues of $346 million.

However, FCX has been on an aggressive acquisition pace, most recently in the fourth quarter of 2017 with the acquisition of Eads Distribution, Houston, TX, which added an estimated $100 million in revenue on top of several other smaller acquisitions earlier in 2017.

The deal is significant in that Applied’s fluid power segment, as reported in MDM's 2018 Competitive Landscape for Wholesale Distribution report, accounts for approximately $700 million, or more than 25 percent, of its total annual revenue.

The FCX acquisition, with expected 12-month revenue of $550 million, boosts Applied’s combined specialty fluid power and flow control businesses to close to 40 percent of total revenue. It’s a strong move, sweetened by FCX’s 35-percent margins, to protect against increasing online sales of industrial products, as well as differentiate its technical capabilities against offerings by traditional competitors.

The deal gives Applied a flow control technical sales force of 222 outside sales and 174 inside sales reps who can cross-sell Applied products, as well as 262 service technicians. Combined, there will be 430 service centers with more than 70 repair facilities for fluid power and flow control products.

FCX has 68 locations, with a concentration east of the Mississippi and strong Texas coverage west up through Colorado to Minnesota. There is great potential to leverage AIT’s strong western states presence as well as into the Southeast for FCX products.

The sales mix for FCX is 75 percent MRO, 12 percent OEM, and 13 percent EPC (Engineering, Procurement and Construction contractor projects).

The deal gives Applied a stronger position in process industries that make up more than half of the FCX customer base. FCX’s largest sector is in petrochemical (27 percent), followed by distribution resale (13 percent). These are followed by food & beverage (9 percent), oil & gas (9 percent), pharmaceuticals (8 percent), and steel & metals (7 percent).

FCX Customer Segments
Source: FCX Performance Acquisition Overview – AIT Investor Presentation, Jan. 9, 2018

Except for some overlaps in pumps, the product lines are mostly complementary. FCX distributes highly engineered valves, instruments, pumps, and lifecycle services to MRO and OEM customers across diverse industrial and process end markets. The company’s value-added solutions help customers improve cost productivity, reduce downtime, increase efficiency and effectively meet increasing regulatory compliance standards.

FCX operates 68 locations with more than 1,000 team members. The acquisition is anticipated to contribute approximately $550 million in sales and $68 million in EBITDA in the first 12 months of Applied ownership.

FCX has been the primary consolidator of the specialty flow control distribution sector, with more than 20 acquisitions since 2000.

The pending acquisition of FCX "further enhances our position as a differentiated industrial distributor,” said Neil Schrimsher, Applied's president and CEO. “FCX brings to Applied market leading, value-added specialty flow control expertise with premier brands, high-touch technical service, an extensive footprint, and strong customer relationships. This compelling adjacency move is an excellent fit, especially when considering served industries, customer opportunities, engineering capabilities and value-added services.”

"We believe that distributors like FCX Performance and Applied Industrial, through their strong technical selling models, provide customers with solutions that cannot easily be replicated by online competitors," said Jason Kliewer, co-head of Baird’s distribution group, which advised FCX on the transaction.