MRO distributor Lawson Products, Inc. (NASDAQ: LAWS) and private investment firm LKCM Headwater Investments reached a merger agreement that will allow Lawson to combine TestEquity and Gexpro Services in an “all-stock transaction.”

TestEquity and Gexpro Services are currently two of LKCM Headwater’s portfolio companies. The deal will allow Lawson to combine the two companies in an accretive transaction on an adjusted basis.

Affiliates of LKCM Headwater that currently own TestEquity and Gexpro Services will receive “solely Lawson common stock as consideration for the transactions,” Lawson announced.

“All three leading niche industrial distribution companies will be brought under a holding company with all three companies operating independently with their existing management teams as separate divisions,” Lawson said.

After the deal closes, Lawson’s capitalization is expected to consist of approximately 19,400,000 shares, of which approximately 9,100,000 shares, or 47%, would be held by existing Lawson shareholders; more than 3 million shares, or 17%, would be held by the existing owners of TestEquity, including LKCM Headwater affiliates and the TestEquity management team

About 7 million shares, or 36%, would be held by the existing owners of Gexpro Services, including LKCM Headwater affiliates and the Gexpro Services management team. Existing owners of TestEquity and Gexpro Services also have the ability to earn an additional 700,000 shares and 1 million shares, respectively, “upon achieving certain additional accretion and other metrics set forth in the merger agreements,” Lawson said.

LKCM Headwater affiliates currently beneficially own approximately 48% of Lawson’s outstanding shares, and upon completion of the deal, affiliates of LKCM Headwater will beneficially own approximately 75% of Lawson’s shares; their ownership would increase to approximately 77% of Lawson’s shares if all of the 1,700,000 additional shares are earned, Lawson said.

“All Lawson shares outstanding immediately before the completion of the combination will remain outstanding after the combination, and existing Lawson shareholders will continue to hold shares in the combined company,” the company said.

“Through the combination of these three complementary valued-added distribution businesses, we strongly believe the holding company will be well-positioned to leverage its combined leadership, strong balance sheet and stable cash flow generation to drive more transformational value creation for shareholders,” said J. Bryan King, chairman of the board of directors of Lawson and Managing Partner of LKCM Headwater. “Our confidence in the ultimate success of the combination is evident in that we will receive no cash proceeds, and not sell any shares in connection with the combination. We will maintain a substantial investment in the combined company. We have approached and will continue to approach the combination of these businesses by aligning our interests with those of current Lawson shareholders, as well as the interests of other long-term shareholders in the holding company. Beyond our financial commitment, our investment team has invested, and will continue to invest, substantial amounts of their time engaging in constructive efforts to leverage our resources and extensive distribution expertise to create a more valuable and durable business, without receiving any compensation from the holding company, including my continued service as Chairman on an unpaid basis.”