Adam J. Fein, president of Pembroke Consulting and author of the new Facing the Forces of Change: Lead the Way in the Supply Chain report; Joel S. Becker, CEO of wholesale firm Torrington Supply Co., Waterbury, CT, and current president of the American Supply Association; and Chris Perry, president/CEO of wholesale firm VAMAC, Richmond, VA, and current president of buying group WIT & Co. Ltd., shared their observations on the acquisition and its potential impact.

Fein

Q: WHAT IMPACT WILL THIS ACQUISITION HAVE ON THE PHCP DISTRIBUTION INDUSTRY?

Adam Fein: “In the short run, the purchase won’t have much impact on the industry. The plumbing and HVAC contractor industry remains highly fragmented across many specialties and is dominated by small businesses. Despite attempts at consolidation within some specialties, more than 85% of contractors work in small businesses with fewer than 10 employees. The fragmentation of customers will continue to support many wholesalers.  In fact, data from my 2007 NAW Economic Reports shows that 75% of the 6,000 U.S. PHCP wholesalers have fewer than 20 employees.”

Joel Becker: “I don’t see that this is a major event in our industry. The Home Depot acquisition of Apex, Hughes and others really was, from what I understand, transparent to their customers and I suspect that the new buyers will try to do everything they can to make the move transparent to their customers again. I imagine there might be some changes in vendor relationships with the sale, but I suspect that will be low-keyed also.”

Chris Perry:  “From the news articles as of June 20, 2007, three private equity firms have joined together to purchase HD Supply. Two of those firms have seasoned, successful leaders from PHCP distribution active on their board of directors. Their guidance will give a focused direction to HD Supply, whatever their future plans are, vs. the “on-hold” status waiting for the sale to take place.”



Becker

QWHAT DO YOU THINK THE NEW OWNERS ARE LIKELY TO DO WITH HD SUPPLY?

For example, might they gut the company to save expenses or sell it off piecemeal?

Adam Fein: “The private equity firms now have the opportunity to build HD Supply into a unified common business. But to do that, they will probably divest some of the many companies that became part of HD Supply.”

Joel Becker: “The returns in our industry are low compared with those private equity firms traditionally invest in, so it makes one wonder why they’d make this investment - especially at 12 x EBITDA.  It is hard for me to imagine them being able to cut costs while maintaining customer service levels enough to deliver double-digit returns, so perhaps they have other plans for the company.”

Chris Perry:  “A blend of both actions will be probable. They will generate short-term cash necessary to either create a new entity or to sell part or all for a profit.”



Perry

QWILL THIS MAKE HD SUPPLY A GREATER OR LESSER COMPETITOR?

Adam Fein: “A newly focused HD Supply will be a more significant competitor. However, well-run independent PHCP distributors will continue to thrive due to their great skill in maintaining high levels of customer service and generating customer loyalty.  Midsized wholesaler-distributors could feel the greatest pressure because they will lack the scale advantages of larger companies with multiple locations, while not being as nimble as the smaller wholesale distribution competitors.”

Joel Becker: “I don’t think this will affect HD’s competitive advantage and imagine things will continue pretty much business as usual.”  

Chris Perry:  “If their long-term plans are to resell part or all of the company for a profit, most likely they will remain the same size, just more profitable. If the active board members within the private equity firms with PHCP distribution experience take active leadership roles, attract the right talent from their past networking and relationships, and create or rejuvenate into a new entity, then long-term they could become a larger player in the market.”