Merger and acquisition activity across the distribution landscape has endured the same countervailing winds as the industry itself, yielding a lackluster result midway through the year, according to analysts in M&A in Distribution, Part 1: M&A Mirrors Economy
Three overriding themes – energy, price transparency and the strong U.S. dollar – "have meant that it’s been a little harder to demonstrate the growth of a platform, and there’s been a slowdown in upper middle market M&A this year,” says Jason Kliewer, co-head of Baird’s distribution investment banking group. "But at the same time, distributors are continually looking for ways to augment the top line so they have been active with bolt-on acquisitions."
The result is a tepid M&A market for the first half of 2016, which hasn’t been able to match the volume and size of deals from a year ago, when high-dollar and high-profile acquisitions were the norm.
“You factor all that in and we are seeing a slight pullback in volume as well as the quality of companies in the market selling their businesses, both private equity-owned and family- or founder-owned businesses,” says T.J. Monico, head of distribution, investment banking, KeyBanc Capital Markets.
According to data from Supply Chain Equity Partners’ proprietary distribution database, there were 465 wholesale distribution transactions completed in 2015. Of those, 322 were strategic buyer transactions, 79 were private equity-backed strategic buyers and 64 were private equity-backed platforms.
Whether 2016 reaches those marks remains to be seen, but most analysts are forecasting a bump in the second half of the year as the economy improves, strategic buyers look to buy growth and financial buyers look to deploy capital in distribution, according to Jim Miller of Supply Chain Equity Partners.
"There’s still tons of cash on the sidelines," he says. "The strategic buyers are dominating the market right now, but that comes in waves, as well. There’s a trillion dollars of buying power in private equity right now, and they have a period of time that they need to invest that money. With every day that passes, that money needs to be invested, and there’s increasing pressure to invest that money.”
Read more about the current state of industry consolidation in M&A in Distribution, Part 1: M&A Mirrors Economy.
