Modern Distribution Management / Vol

Vol. 37, No. 12 Modern Distribution June 25, 2007 The Newsletter for the Management Wholesale Distribution Channel

Home Depot Sells Off Supply Unit INSIDE New owners committed to acquisition strategy

After months of speculation, The Home Depot assets after taking full ownership. The new Know Your has agreed to sell its wholesale division, HD owners however do plan to continue build- Customers Supply, and bring its focus back to the perfor- ing the company through acquisitions. mance of its retail core. Three private equity “That we will certainly do,” Novak said. Interline Brands looks firms will buy the $12 billion unit. “Local scale is very important for produc- to grab bigger share of

tivity and service levels.” customers’ wallets. By Lindsay Young That means that HD Supply, with $12 Page 4 billion in sales in 2006, will continue as The Home Depot, Atlanta, GA, has agreed a major player in the distribution M&A The Gray Market to sell HD Supply to a team of private market. and Distribution equity firms – Bain Capital LLC, Carlyle A look at a recent lawsuit Group and Clayton Dubilier & Rice Inc. History – for $10.3 billion, or roughly 10X-12X Little more than a month after former CEO between a supplier and a

EBITDA. The firms are splitting the invest- Robert Nardelli retired, HD announced in distributor. ment equally. February it would consider a potential HD Page 5 The sale has been expected for weeks Supply spin-off. Nardelli had pushed the now, with a number of private equity wholesale division as a way to diversify Suppliers Fight firms rumored to have bid for the unit and HD’s offering and spark growth to balance Counterfeiting several to have bowed out due to the down out a slowing retail division. Schneider Electric bars 3 housing market – one of HD Supply’s core While HD had reported that some companies from selling customer bases. HD Supply reported a de- investors wanted it to stick with its HD product; nail producers crease in organic sales in the recent quarter. Supply strategy, other investors were quite target dumping practices. “This was not an easy decision,” HD vocal on their dissatisfaction with the Page 7 CEO Frank Blake said. “(HD Supply chief) wholesale business. They called it an un- Joe DeAngelo and his team have built a necessary diversion from the retailer’s core Grainger at a world-class operation over the last few business. This included Ralph Whitworth, Glance years. We gave careful consideration to a an activist investor whose firm, Relational number of options, including holding onto Investors, recently won a seat on HD’s Sales by product category the business.” board of directors. and customer segment Blake said that selling HD Supply in Home Depot has spent the past few for $6B distributor. pieces, as some industry-watchers expect- years building up its wholesale unit, which Page 3 of Industrial & ed, would have been “timely and distract- originated back in the mid-1990s. It bought Construction Markets ing,” with the added cost of separating the $5.5 billion diversified distributor Hughes Update businesses. An IPO, another option con- Supply for $3.4 billion, or 12X EBITDA, in sidered, would have resulted in a multiple early 2006, and National Waterworks, at discount relative to the sale of the entire the time with $1.5 billion in annual sales, business. for $1.35 billion in mid-2005. Industry-watchers say HD Supply’s In 2004, Home Depot acquired White new owners will likely sell off some of HD Cap Construction Supply, then a $500 mil- Supply’s assets almost immediately in an lion distributor. effort to better integrate the wholesale unit The year 2005 started an acquisition under a common platform. frenzy, which included $400 million Wil- CD&R’s David Novak said that it liam Bros. Lumber, Contractors’ Ware- ® is premature to say whether the private house, the $100 million Greenwald Supply equity team will divest any of HD Supply’s continued on next page mdm Copying or reprinting all or parts of this newsletter without specific permission violates federal law! www.mdm.com ® mdm Modern distribution management / Vol. 37, No. 12 / June 25, 2007 Inc. and Greenwald Industrial Products Com- Impact on M&A Market pany, fastener and industrial supplies distribu- In a recent MDM audio conference, Jim Miller, tor Brafasco, and catalog MRO supplier Utility who heads the distribution practice at invest- Supply of America Inc. ment banking firm Vetus Partners, said that Crown Bolt Inc., a distributor of fasteners even talk of a potential HD Supply spin-off had and hardware, was acquired in 2005, as well – its a slight impact on valuations in the distribution primary customer is Home Depot. Blake con- M&A marketplace. firmed that Crown Bolt was included in the sale The effect of talk of a divestment came from of HD Supply. Home Depot has signed a seven- two areas: “One, the position of Home Depot as year supply agreement from Crown Bolt. a competitive buyer against another bidder, or In 2006, HD Supply made almost $4 billion at least the perceived threat of Home Depot as a in acquisitions, starting with the Hughes buy. competitive buyer,” Miller said. Its other acquisitions in the past year were quite “And two, Home Depot Supply as a poten- diverse, including distributors in waterworks, tial exit opportunity. There were several private electrical, concrete and utilities. equity funds that were chasing distribution “Home Depot has finally faced the inevi- investments with the intent of buying them, table truth they could not run the collection holding them for a period of time and poten- of companies they acquired over the past five tially flipping them to HD Supply.” years,” said Adam Fein, president of Pembroke The firms likely will pay closer to 12X Consulting. “The private equity firms taking EBITDA for HD Supply, according to Miller. over have the opportunity to build a unified “When they started this process, I believe they common platform. But to do that, they will prob- were touting approximately $1 billion of EBIT- ably divest some of the companies that are a part DA from HD Supply. With the recent softening of HD Supply.” of some of their end markets, particularly the In mid-May, Grainger President Jim Ryan residential end market, I’m guessing that HD told analysts that the new owners will have Supply’s most recent trailing 12 months’ EBIT- the same challenges in unifying HD Supply’s DA was closer to $800 million than it was to $1 diverse businesses. “The challenges in building billion. the HD Supply business exist regardless of who “That’s a full purchase price, but I still be- owns them … It takes time, patience and a lot of lieve that CD&R (and the other firms) are getting money. That said, it can be done. But a change in a good collection of assets and the investment ownership doesn’t change any of this.” will be a good one over time.” Miller said that the final sale price of $10.3 billion is a “good sign” for distributors contem-

Modern Contact Information Distribution Questions, comments, article proposals, address changes MDM Editorial Advisory Board Management or subscription service to: David K. Barth Founded in 1967 Gale Media, Inc. Member of the Board of Directors of the by J. Van Ness Philip 2737 Mapleton Avenue, #201, Boulder, CO 80304 Tel: 303-443-5060 Fax: 303-443-5059 Industrial Distribution Group Website: http://www.mdm.com Publisher Kevin Boyle Subscription Rates Thomas P. Gale Vice President Industrial Distribution and Channel [email protected] To subscribe to Modern Distribution Management, please call 303-443-5060, email [email protected] or http://www.mdm.com. Management for the Loctite Industrial Division of Editor Henkel Technologies Lindsay Young Subscriptions are available by online delivery and/or first-class mail. [email protected] Three-year archives of MDM are available online to subscribers. Previous-year archives are available at a Larry Goode Marketing Director discounted rate to current subscribers. CEO of RT Dygert International, Inc. Kim Sorensen [email protected] Published twice monthly; $345/yr., $365 U.S. funds other Julia Klein countries; $169 each additional subscription to a company ($189 other countries). For group subscription rates and site licenses, President and CEO of C.H. Briggs Hardware Co. please contact Tom Gale at 303-443-5060. Stuart Mechlin Copyright © 2007 by Gale Media, Inc. All rights reserved. Modern Vice President, Industrial Supply Division of Distribution Management® and mdm® are registered trademarks of Gale Media, Inc. Material may not be reproduced in whole or in part Affiliated Distributors in any form whatsoever without permission from the publisher. To request permission to copy, republish, or quote material, please call Walter W. Norton Jr. 303-443-5060. President and COO of Norton Electric Wholesale ISSN 0544-6538

Copying or reprinting all or parts of this newsletter without specific permission violates federal law! www.mdm.com ® Modern distribution management / Vol. 37, No. 12 / June 25, 2007 mdm plating selling part or all of their businesses. end markets insulated from global competition, Some industry-watchers expected the price to be such as facilities maintenance, construction, or closer to 8X EBITDA. health care services. He says that deals of this magnitude typi- The firms buying HD Supply are no strang- cally “set the bar” for valuations in the sector ers to the distribution world. Clayton Dubilier – valuations for smaller companies are then & Rice invested in global electrical distributors discounted from that bar. “Even with a signifi- Rexel Inc. and Wesco International, and recently cant discount to this bar, valuations for smaller sold its investment in $3.2 billion lab supplier distributors in this sector should hold fairly well VWR International Inc. Also, the former CEO in the near term,” he says. of building materials and plumbing distributor Wolseley plc (parent of Stock Building Supply Private Equity & Distribution and Ferguson) is an operating partner at CD&R. More than 100 private equity firms are targeting Carlyle has recently made industrial and distribution right now, thanks to low-cost fi- construction investments, as well, including nancing, high valuations and a healthy earnings Goodyear Tire and Rubber Company’s Engi- environment. That has provided a “great selling neered Products Division. It previously owned opportunity for quality distribution businesses,” PT manufacturer Rexnord before selling it to Robert W. Baird & Co.’s Tom Lange said during Apollo Management. the recent MDM audio conference. Fein said private equity is being attracted by Comment on this article at the MDM Blog, the ongoing need for wholesale distribution to www.mdm.com/blog.

Timeline of Home Depot Supply Expansion

Overview: Home Depot’s supply business comprised about 12 percent of Home Depot’s total revenues, or roughly $12 billion of its $90 billion in 2006.

Acquisition Timeline (Company revenues at time of acquisition where available; all acquisitions not listed):

2006 ● Hughes Supply, $5.5 billion ● Grafton Utility Supply ● Texas Contractors Supply ● Edson Electric Supply ● Western Fasteners ● Cox Lumber, $396 million ● Forest Products Supply

2005 ● National Waterworks (water and sewer systems market), $1.5 billion ● William Bros. Lumber (building materials), $400 million ● Utility Supply of America Inc. (catalog supplier of MRO supplies to water and wastewater treatment market) ● Contractors’ Warehouse (building materials) ● Greenwald Supply Inc. and Greenwald Industrial Products Company Inc., $100 million ● Litemor Distributors (commercial lighting) ● Crown Bolt Inc. (fasteners, hardware and related products) ● Brafasco (fasteners and industrial supplies)

2004 White Cap Construction Supply, $500 million

2001 Your “other” Warehouse (plumbing supplies)

2000 Apex Supply (plumbing supplies and HVAC distributor)

1996 Maintenance Warehouse/America Corp. (direct-mail marketer to apartment building maintenance market), $30 million Source: MDM Research

To successfully integrate its company and grab over the years.” At Interline, sales reps are also market share, Interline Brands has had to pay brand-specific, and the catalogs look and feel close attention to and respond to the needs of the same as they did when Interline acquired acquired and current customers, Interline Brands them, he said. President William Sanford said recently at the Sanford said it is key to “approach a cus- JPMorgan Basics & Industrials Conference. tomer the way the customer wants to be ap- In fact, learning about customers starts proached.” before an acquisition is even made, he said. “The For example, Interline has two MRO relationships we acquire are important. We have catalogs in place for facilities maintenance. Its to understand how strong those relationships are Wilmar catalog includes 99 percent of what an before we make an investment,” Sanford said. apartment community can use. But that custom- The $1 billion distributor of facilities main- er also requires Interline have a field sales rep tenance products was formed through a series in place and Interline trucks for delivery. The of mergers of more than 20 companies in the distributor is able to charge a premium for this plumbing supply and facilities maintenance high level of service. industries. On the other hand, Maintenance USA, Last year it bought American Sanitary Inc., a Interline’s other MRO catalog for facilities main- rollup and national distributor of janitorial and tenance, focuses on smaller properties that don’t sanitary supplies, providing Interline a higher- have a maintenance manager on site. That sales margin and complementary product line. This model relies on telesales and direct mail, rather has beefed up customer spend with Interline than the high-touch model Wilmar uses. For from just 10 percent of a customer’s wallet to a Interline, that means a lower cost to serve and a potential 30-40 percent, Sanford said. lower price for the customer. AmSan also nearly doubled the number of Despite the fact that Interline carries many customers in Interline’s portfolio. The two com- brands on the front-end as displayed in its many panies fortunately had just a 5 percent customer catalogs, on the back-end many of the products overlap. That has provided clear opportunities are the same. They are not branded until they for Interline to cross-sell. hit the shipping dock. Interline also owns Wilmar, Sexauer and This integrated operating platform, with Travco brands, along with Barnett, Hardware one distribution network, enables Interline to ca- Express, Maintenance USA, U.S. Lock, Leran and ter to its diversified customer base in an efficient Barnett of the Caribbean, and others. Interline manner. To manage the platform, Interline has a sources private label product by the container proprietary IT system with a relational database from China. Private label comprises roughly 20 for the multiple part numbers and price points. percent of the distributor’s product. Using an integrated back-end fuels Inter- “Increasingly customers will price-shop line’s desire to build out the number and types different items at a retailer and when a contrac- of products it is selling at specific customers, tor comes in they can minimize the contractor’s either from a supplier it is already using or from gross profit by forcing that contractor to buy an another Interline catalog. item at a retailer,” Sanford said. “But by using our exclusive brands, the contractor can buy the Understand Customer Needs product at half what it would cost at a retailer It’s also important to understand how custom- and mark it up to increase his profitability but ers view certain product lines, Sanford said. still save the customer money.” For example, Interline’s institutional customers see janitorial and sanitary distribution as a The Name on the Door “service,” while they view Interline’s plumbing Every brand – private label or otherwise business as just a source of product. – reaches a different customer niche, and many Because of this, Sanford said that Interline came from distributors Interline acquired. “In is more successful in the institutional markets MRO, the name on the door is very important,” at converting jan-san customers to its other Sanford said. “The customers prefer to do busi- product lines than the other way around. “They ness with companies they’ve done business with are much more willing to listen to our story

Copying or reprinting all or parts of this newsletter without specific permission violates federal law! www.mdm.com ® Modern distribution management / Vol. 37, No. 12 / June 25, 2007 mdm on plumbing and electrical products than the customer money and replenishing only what reverse,” he said. was written down the day before as used. As a In the contractor market, Interline has spent result, Interline has brought the average shrink- time learning and understanding the customer age of its contractor customers from 15 percent base – especially after buying Barnett in 2000. At down to 2-3 percent a year. the time, Barnett was a mail-order business with “We can manage each truck as a profit cen- just 3-7 percent of individual customer spend. ter for the owner of that business, and we can The distributor’s customers were primarily get 100 percent of that business,” Sanford said. plumbing contractors. But the company also had “During the last 12 months we have seen some a “very good product offering,” Sanford said, softness in that space, but we have continued “and were pioneers in Asian sourcing in the to set up new vendor managed inventory and plumbing industry.” truck programs. … We have a lot of prospects So Interline asked Barnett’s customers how it in the pipeline and a lot of signed deals in the could become a more important supplier. “They pipeline that will be implemented in the next 12 told us, ‘You need to be local, and you have to months.” have will-call. Fill out your product offering and offer more things like HVAC and copper tub- Learn more about creating additional sales oppor- ing.’” tunities at existing customers. Order the CD of the In addition to taking in these concerns, MDM Audio Conference, “Create Spend in Interline also looked at how it could save money Manufacturing Accounts: How to Mine Additional for the contractors. The distributor found that Sales Opportunities,” at MDM Conferences online, it could help manage shrinkage off contractor www.mdm.com/conferences. trucks by creating a truck stock program, using Or call 1-888-742-5060. private label product where it could to save the

The Gray Market and Distribution Law is fuzzy; suppliers aim to eradicate practice

The gray market is ill-defined and can range from utor’s president. According to reports, the suit legitimate goods intended for sale elsewhere sold in settled for upwards of eight figures. an unauthorized area, to outsourced manufacturers who generate more product than that ordered by an Defining Gray Market OEM, to goods that are remanufactured after use, to The gray market is of course not new to distri- pure piracy. Here’s a look at a recent case between a bution, but it means different things to different manufacturer and distributor. people, depending in large part on the industry involved, and takes on several forms. By Fred Mendelsohn In a case I filed on behalf of a large supplier of heavy construction equipment, the gray Recently, Hewlett-Packard resolved a “gray market refers to the importation into the U.S. of market” lawsuit that it filed in a federal district heavy equipment destined for other countries court in Tennessee against one of its by-then ter- (e.g., China), and not authorized for sale in minated distributors and one of the distributor’s North America (the supplier’s general exclusive customers. territory), much like the importation of non- In essence, HP claimed that its distributor vi- American bound luxury cars. olated the terms of its authorized reseller agree- In the luxury car market, importers take ment by purchasing products at deep discounts advantage of exchange rates and the generally and then selling the products to a customer not lower prices of cars destined for sale in places authorized by HP. like the European Union, modify the cars to The distributor allegedly worked with one meet U.S. safety and emission standards, and of its customers to “cook up” false reasons for sell them at a deeply discounted price – all to ordering extra products in order to sell them to the chagrin of the authorized luxury automobile an unauthorized customer. As a result of this dealers. conduct, HP filed suit against the distributor, the Similarly, the parallel importation of unau- customer involved, its president, and the distrib- Continued on next page

Copying or reprinting all or parts of this newsletter without specific permission violates federal law! www.mdm.com ® mdm Modern distribution management / Vol. 37, No. 12 / June 25, 2007 thorized heavy equipment leaves the purchasers distributor or reseller. without the benefits of authentic goods, such as The reseller had agreements with HP for warranty protection or regulatory review, and both printers and laptop computers (through without the support of the supplier’s customer Compaq, which was purchased by HP), which service organization. provided for the purchase by the second tier Of course, this “gray market iron” has ad- distributor from first tier distributors at deep ditional risks: discounts, and resell the products only to cus- l It may not have interchangeable compo- tomers in the U.S. nent parts, The pricing programs required the second l may pose additional liability exposure to tier reseller to support in writing the reasons the user, for the deep discounts, which the second tier l may have illicit or counterfeit parts, and distributor did allegedly in cahoots with its l may have higher failure rates and require customer. HP believed, and alleged, that the greater levels of service than legitimate second tier reseller purchased the products with equipment. the intent to sell, and in fact sold, the products to In many gray market cases (unlike the black purchasers in Saudi Arabia. market), the transactions are not illegal, but are HP asserted claims of common law conspir- not authorized by the manufacturer. As such, acy, fraud and unjust enrichment, plus breach suppliers do not always have legal redress and of the reseller agreement against the second tier have to resort to other tactics to address the is- distributor and its alleged customers, plus the sue. presidents of each business, as individuals are For example, some years ago, NEDA initi- always liable for individual tortious acts. ated an authorized supplier communications and advertisement campaign, and several of the Discounts Drive Market large, electronic suppliers (Cisco Systems, Nortel The gray market is ill-defined and can range Networks and others) formed the Alliance for from legitimate goods intended for sale else- Gray Market and Counterfeit Abatement to where being sold in an unauthorized area (like combat the gray market. the heavy equipment and luxury auto exam- ples), to outsourced manufacturers who gener- Redress ate more product than that ordered by the OEM, In the heavy equipment case, the supplier has a to goods that are remanufactured or reconfig- remedy, in part because the units that surfaced ured after use (like the products of the members in various places in the U.S. bore fictitious se- of the AGMA), to pure piracy, where the goods rial numbers. Under federal unfair competition and parts are counterfeit, or where legitimate laws, this type of shadow product distribution distributors with access to product look for cre- is illegal, especially because it causes confusion ative ways to obtain and resell at large profits. among end-users as to legitimate product and Either way, deeply discounted prices are shadow product. the driving force for the distribution of shadow Is it protected by warranty? Can purchasers goods, which has negative implications across obtain authentic replacement parts, intended the supply chain. As long as there is a buck to be for these non-authorized imports? Do the units made, shadow or gray market brokers will look comply with U.S. safety and emission stan- to generate sales, irrespective of deficiencies in dards? the products sold, and to the detriment of those Other remedies are found in the damage to who participate in authorized distribution. the goodwill and trade name and/or trademark Regardless of the industry, manufacturers, of the goods themselves, including under anti- distributors and those in the shadows will likely dilution statutes, which generally protect certain see an increase in effort and creativity by suppli- famous trade names, trademarks and service ers and their counsel to target and eradicate gray marks from blurring or tarnishing (without the market activities. need for showing consumer confusion – a hall- mark of traditional trademark claims). For more information, please contact Fred Men- In the Hewlett-Packard case, HP was able delsohn at [email protected] or 312-840- to use traditional common law theories of li- 7004. ability and the underlying reseller agreement to redress its gray market claims, which in that case involved an existing authorized second tier

Copying or reprinting all or parts of this newsletter without specific permission violates federal law! www.mdm.com ® Modern distribution management / Vol. 37, No. 12 / June 25, 2007 mdm Schneider Electric Continues Campaign Against Counterfeiting Three companies banned from selling Square D products North American Breaker Co. (NABCO) has been The injunction arose out of Square D’s enjoined in federal court from buying or selling claims that CES and TES sold counterfeit circuit virtually all Square D QO circuit breakers, and breakers bearing Square D trademarks. Square two other companies – CES Liquidating Inc. D claimed that the two sold 85,000 counterfeit and TES Liquidating LLC – have been enjoined circuit breakers. from selling any of Schneider Electric’s Square D Square D had filed suit Dec. 20, 2006, alleg- products. ing that CES and TES participated in advertis- Square D filed suit against NABCO on July ing, product disparagement and trademark in- 26, 2006, contending that the company placed fringement in violation of federal and state law. 50,594 counterfeit Square D circuit breakers In order to prevent the potential purchase of into the field. In the suit, Square D alleged that counterfeit products, customers should continue NABCO was guilty of trademark infringement. to purchase their Square D products from autho- “Counterfeit Square D products pose serious rized Square D distributors. health and safety hazards to innocent custom- Square D is a brand of Schneider Electric for ers,” said Bill Snyder, vice president-channel National Electrical Manufacturing Association distribution for the Schneider Electric North type electrical distribution and industrial control American Operation Division. “Through this products, systems and services. Square D prod- lawsuit and others like it, Square D has dem- ucts are found in all types of residential, com- onstrated its ongoing commitment to prevent mercial and industrial construction, in a wide counterfeiting and protect Square D’s customers, range of manufacturing and processing facilities, trademarks and designs.” and in or on the products of other manufactur- The suit against NABCO also requires the ers. company to provide Square D with records A copy of the lawsuits and Consent Orders going back to 2004 identifying its suppliers and for Permanent Injunctive and Other Relief are purchasers of Square D products, along with available by calling the Square D Legal Depart- information about quantities acquired and sold. ment (847) 397-2600. “Armed with NABCO’s supplier list, Square Headquartered in Palatine, IL, the North D has every intention of pursuing counterfeiters American Operating Division of Schneider up and down the distribution chain,” Snyder Electric had sales of $3.7 billion in 2006. The said. North American Operating Division is one of CES Liquidating Inc. (formerly Connecticut four operating divisions of Schneider Electric, Electric & Switch Manufacturing Company) and Paris, France, and markets the Square D, Telem- TES Liquidating Inc. (formerly Tacoma Electric ecanique and Merlin Gerin brand products. Supply LLC) are permanently enjoined from Schneider Electric has 2006 sales of $17.2 billion marketing, selling, distributing, purchasing and worldwide. importing any Square D products.

U.S. Nail Producers File Dumping Case Against China, UAE

Five U.S. producers of steel nails have filed an- Peru, IL; and Treasure Coast Fasteners, Inc., Fort tidumping duty petitions alleging that dumped Pierce, FL. imports of nails from China and the United Arab Domestic nail producers contend that un- Emirates (UAE) are causing material injury to fairly priced imports of steel nails have injured the domestic industry. The petitioners allege an- the U.S. industry by undercutting their prices tidumping margins of 59 percent to 136 percent and taking sales based on unfair trading prac- for China and 98 percent to 114 percent for the tices. UAE. The petition requests that the U.S. gov- The petitioners are Mid Continent Nail Cor- ernment impose antidumping duties on nail poration, Poplar Bluff, MO; Davis Wire Corpora- imports from China and the UAE. Antidump- tion, Irwindale, CA; Gerdau Ameristeel Corpora- ing duties are intended to offset the amount by tion (Atlas Steel & Wire Division), Tampa, FL; Continued on next page Maze Nales (Division of W.H. Maze Company),

Copying or reprinting all or parts of this newsletter without specific permission violates federal law! www.mdm.com ® mdm Modern distribution management / Vol. 37, No. 12 / June 25, 2007

which a product is sold at less than fair value in caused severe financial distress to the domestic the U.S. (i.e., the amount by which the product is industry, leading producers to reduce produc- sold below production costs or at a price that is tion, close divisions, and even completely shut below the price charged in a comparable mar- down their nail operations. ket). “Domestic producers need relief from Dumped imports of steel nails from China dumped imports to prevent further plant clo- and the UAE constitute a large and increasing sures and to allow domestic producers to return share of the U.S. market. Imports of nails from to healthy profit levels.” China and the UAE surged from 411,980 short The filing of the petition starts the process tons in 2004 to 698,460 short tons in 2006, or 70 by which the U.S. International Trade Commis- percent. Chinese and UAE shipments accounted sion will determine if the U.S. nails industry has for 75 percent of all nail imports in 2006. been materially injured, or threatened with ma- The petition covers certain steel nails that terial injury, and the U.S. Department of Com- are produced from various grades of steel and merce will determine whether dumping exists. that have a variety of finishes, heads, shanks, The USITC must reach its preliminary points and sizes. Certain steel nails may be sold determination of material injury or threat of in bulk or collated into strips or coils using ma- material injury within 45 days; the Commerce terials such as plastic, paper, or wire. Steel roof- Department is required to announce preliminary ing nails and nails for use in powder-actuated antidumping duties in 160 days. hand tools are not covered by the petition. Once the Commerce Department makes its “Imports from China and the UAE have preliminary determination, U.S. Customs and flooded the U.S. market during the past three Border Protection will require importers to pay a years, taking significant market share from the cash deposit or post a bond equal to the esti- domestic producers,” said Paul C. Rosenthal, the mated dumping margin. The entire investigative lead attorney for the petitioners. “The unfairly process takes about one year. Final determina- priced imports from China and the UAE have tions will happen in mid-2008.

MDM Audio Conference CDs

Succession Planning for Distributors: Leave Your Business Better Listen to Brent Grover in this 90-minute webinar conference as he shares his unique experi- ence as the former CEO of the paper distribution business his grandfather started, as well as the varied knowledge gained through his current consulting business focused on wholesale distribution management. Hear also the lessons learned by two CEOs of well-established, multi-generational distributors who have created thoughtful transition plans. No matter when or how you plan to leave your business, there are key issues to address now to ensure a smooth transition. Whether you plan to sell or pass the torch to your son, daughter or key employee, this 90-minute webinar conference presents the options to consider and fundamental decisions you need to make to have the right pieces in place at the right time. Order the CD and transcript at www.mdm.com/conferences

Distributors M&A Update 2007: More buyers, new drivers in U.S. and overseas Home Depot’s sale of Home Depot Supply has grabbed the headlines, but there is more M&A activity than ever in wholesale distribution. Key drivers include unprecedented liquidity and availability of acquisition financing, historically high valuations, a growing pool of consolida- tors, and emerging global opportunities. What’s the impact for your company in this fast-changing landscape? Three seasoned M&A experts, Brent Grover, Thomas Lange, and Jim Miller share their insight on the state of the 2007 distribution M&A market. In this two-hour audio conference, you’ll hear about financing/debt market trends, strategic buyer activity, private equity markets, M&A drivers nationally and overseas, valuation trends at all market levels, and the outlook for 2007 and beyond. Order the CD and transcript at www.mdm.com/conferences

Copying or reprinting all or parts of this newsletter without specific permission violates federal law! www.mdm.com Vol. 37, No. 12 Modern Distribution Management June 25, 2007 Industrial & Construction Markets Update

Technology distributor Ingram Micro Inc., Santa Ana, CA, has agreed PERSPECTIVE to buy DBL Distributing Inc., Scottsdale, AZ, a distributor of consumer Be careful not to get a sugar high from electronics accessories and related products with 2006 sales of nearly $300 the HD Supply spin-off announced this million. The purchase price is $96 million. The deal strengthens Ingram past week. After a deal of this magni- Micro’s position in a higher-margin niche of the consumer electronics tude, it’s easy to get excited about what market. Ingram Micro reported $31 billion in fiscal 2006 annual sales, and it means once the dust settles. But the overall gross margin of 5.4 percent. dust won’t settle on HD Supply. If any- thing, the non-contributing or distract- US Electrical Services, LLC, Exton, PA, has acquired Pioneer Electric ing units will be shed and a leaner, more Supply, Beltsville, MD. Pioneer has been supplying the needs of electrical focused business will emerge. It was not contractors in greater Washington, DC for almost 16 years. The company purchased to be gutted or dismantled. focuses primarily on large and small new construction and renovation The remaining entity, while smaller in projects. Pioneer will join four other area USESI-owned locations in the size, will likely continue as the lead con- area. solidator in a narrower band of distribution verticals. Reliance Steel & Aluminum Co., Los Angeles, CA, has agreed to acquire The deal will have a large impact in Clayton Metals, Inc., Wood Dale, IL. Clayton Metals specializes in the a few sectors, and virtually no impact in processing and distribution of aluminum, stainless steel and red metal others beyond the perceived valuation flat-rolled products, custom extrusions and aluminum circles through halo effect. Some had anticipated the its four metals service center locations. Clayton Metal’s sales for the 12 price for HD Supply might cool slightly months ended Dec. 31, 2006, were $123 million. due to the weakness of residential markets in North America. The estimated VWR International, Inc., West Chester, PA, a supplier to the global 12X EBITDA valuation of this deal research laboratory industry, has agreed to acquire Bie & Berntsen A-S, means the bar is high for blockbuster a Danish scientific laboratory supply distributor. Bie & Berntsen is one deals. It’s a seller’s market because of of Denmark’s largest suppliers of chemical and laboratory equipment the flood of private equity buyers. with 90 employees, all in Denmark. The company has annual revenues of But it would be a mistake to ex- US$27 million. VWR, a $3.2 billion distributor, recently changed hands. It trapolate the valuation of a distributor was sold to Madison Dearborn Partners in early May. with $12 billion in annual revenues to a company with $12 million in annual SKF has acquired Baker Instruments Company, Fort Collins, CO, a revenues. As MDM’s audio conference manufacturer of test and diagnostic instruments for electric motor assess- speakers noted in May and June, valu- ment, for $14 million. Baker has annual sales of $11 million. “This move ations at smaller companies have been into electric motor diagnostics is important to our new Energy Efficiency about half of the Hughes Supply and solutions business, and is in line with the SKF Group’s move towards sup- HD Supply deals. porting our customers in their sustainability efforts,” said Phil Knights, A popular pastime for pundits president, SKF Service Division. in this industry has been to ponder whether some distributor might be able Diversified industrial manufacturer Eaton Corporation, Cleveland, OH, to scale into a $50-billion international has acquired Pulizzi Engineering, a manufacturer of AC power distribu- entity. A possibility on paper perhaps, tion, AC power sequencing, redundant power and remote-reboot power but it goes against the grain of history. management systems. Pulizzi Engineering had 2006 sales of $12 million It’s a daunting task to scale up a diverse and is in Santa Ana, CA. portfolio of product distribution, gain synergy and deliver the high levels of Schneider Electric will sell MGE UPS Systems to diversified industrial local customer service that define the manufacturer Eaton Corp. The expected move is to fulfill a commitment to core value of distribution. At the same the European Commission following Schneider’s acquisition of American time, it’s dangerous to point a finger at Power Conversion. Eaton is offering 425 million euros (US$569 million) the deal last week and say it proves that for the business, which had revenues of 156 million euros (US$209 million) HD Supply has been a failure. in 2006. continued on next page

Copying or reprinting all or parts of this newsletter without specific permission violates federal law! www.mdm.com ® mdm Modern distribution management / Vol. 37, No. 12 / June 25, 2007 10 Housing starts in May were 2.1 percent below ing a median of 3.7 percent, according to the April and 24.2 percent below May 2006. Year-to- markets National Association of Electrical Distributors in Update date, the steepest declines in housing starts were its annual Performance Analysis Report. The 3.7 supplement seen in the Midwest, with a 33.4 percent fall, percent figure represents the third consecutive p. 2 and the West, with a 28.3% decline. Year-to-date, year of sharp rises in profit margins. Accompa- the steepest declines in permits were again in nying the increased profits were 2006 median the Midwest, with 27.7 percent decline, and the sales increases of 17.4 percent, also the highest in West with a 26.7 percent decline. a decade.

Industrial production was unchanged in May Hagemeyer, Naarden, the Netherlands, an- after a smaller revised increase of 0.4 percent nounced that Rudi de Becker will resign as CEO in April. Output in the manufacturing sector and chairman of the Board of Management of edged up 0.1 percent in May, and mining output Hagemeyer at the next annual general meet- moved up 0.5 percent after declining 0.6 percent ing of shareholders in April 2008. Hagemeyer in April. At 112.7 percent of its 2002 average, said that De Becker wants to spend more time overall industrial production for May was 1.6 with his family. Hagemeyer is a distributor of percent above its year-earlier level. The rate of electrical parts and supplies, safety and other capacity utilization for total industry fell 0.2 MRO products in 25 countries in Europe, North percentage point, to 81.3 percent. America and Asia-Pacific.

April U.S. manufacturing technology con- RBC Bearings Incorporated, Oxford, CT, an sumption totaled $281.54 million, according to international manufacturer of highly-engineered the Association for Manufacturing Technology precision plain, roller and ball bearings for the and the American Machine Tool Distributors’ industrial, defense and aerospace industries, Association. This total was down 27.2 percent reported sales for the fiscal year ended March from March, but up 2.2 percent from the total of 31, 2007, were $306.1 million, an increase of 11.5 $275.43 million reported for April 2006. With a percent from the prior year. Profit was $28.5 mil- year-to-date total of $1,259.09 million, 2007 was lion, up 128 percent from the year before. up 8.7 percent compared with 2006. The Barnes Distribution business segment of Following a strong gain in March, Canadian Barnes Group Inc. has opened an international manufacturing shipments edged down in April. sourcing center in Shanghai, China. The sourc- Shipments decreased by 0.6 percent to an esti- ing center will complement Barnes’ previously mated $49.7 billion. Excluding the motor vehicle established sourcing center in Taiwan. Barnes parts and accessory industries, manufacturing Distribution is a distributor of maintenance, shipments increased1 percent in April. repair, operating and production supplies.

The Producer Price Index for Finished Goods Canadian wholesalers posted sharply lower increased 0.9 percent in May, the U.S. Bureau of sales in April, as declines in a number of major Labor Statistics of the U.S. Department of Labor sectors erased all of the strong gains made over reported. This advance followed a 1.0-percent the previous two months. Overall sales fell by increase in March. The index for finished goods 3.1 percent in April to an estimated $42.8 billion. excluding foods and energy moved up 0.2 per- April’s drop was the largest since August 2003 cent in May. and followed increases of 2.3 percent and 0.9 percent in March and February respectively. Five The industrial producer price index rose by 0.4 of the seven wholesale sectors registered de- percent in the euro area in April 2007. In March, clines in April. Leading the way was the auto- prices increased by 0.3 percent. In April 2007, motive products sector (-8.3 percent), followed compared with April 2006, industrial producer by “other products” (-5.9 percent) and machin- prices gained 2.4 percent in the euro area. The ery and electronic equipment (-2.3 percent). highest year-over-year increases were recorded in Luxembourg (8.7 percent), Hungary (8 per- Builder confidence declined two more points cent), Bulgaria (7.9 percent) and Lithuania (7.3 in June, according to the National Association of percent). A decrease was registered in Denmark. Home Builders/Wells Fargo Housing Market In- dex. With a reading of 28, the HMI now is at the Profits for electrical distributors in 2006 rose lowest level in its current cycle and has reached sharply to the highest level since 1993, reach- the lowest point since February 1991.

Copying or reprinting all or parts of this newsletter without specific permission violates federal law! www.mdm.com ® Modern distribution management / Vol. 37, No. 12 / June 25, 2007 mdm 11

Grainger by the Numbers: 2007 Factbook markets W.W. Grainger, Chicago, IL, $5.9 billion broad-line distributor of facilities maintenance prod- Update ucts, sells primarily to industrial and commercial maintenance departments, contractors and supplement p. 3 government customers. The company has been driving two initiatives: market expansion, which is nearly finished in the U.S., and product expansion. Grainger recently released its 2007 Factbook, which is full of statistics on its operations in the U.S., Mexico, China and Can- ada. The following graphics were pulled from that Factbook, which is available on Grainger’s Web site, www.grainger.com.

U.S. Sales Breakdown

Canada Sales by Product Line Acklands-Grainger

Technology distributor Ingram Micro Inc., Santa importance of retailers in the marketplace. The Ana, CA, has agreed to buy DBL Distributing transaction is an example of how we plan to Inc., Scottsdale, AZ, a distributor of consumer deploy capital in the future - through strategic electronics accessories and related products with acquisitions that spur growth, enhance profit- 2006 sales of nearly $300 million. The purchase ability and expand our addressable market.” price is $96 million. DBL Distributing offers a comprehensive The deal strengthens Ingram Micro’s posi- mix of more than 17,000 consumer electronics tion in a higher-margin niche of the consumer products to independent retailers across the U.S. electronics market. Ingram Micro reported $31 The company reported 2006 sales of nearly $300 billion in fiscal 2006 annual sales, and overall million, following four years of double-digit gross margin of 5.4%. sales growth, with gross and operating margins The Consumer Electronics Association double those of Ingram Micro’s core distribution estimates the consumer electronics market at business. In 2006, DBL was recognized as the $155 billion in 2007, with the accessories market 15th largest privately held and the 13th fastest at $11 billion. The industry is forecast to grow at growing company in Arizona. 7% in 2007 following a 13% growth rate in 2006. “While our purchase of AVAD two years An industry analyst told MDM the sub-category ago made us leaders in the custom installation of consumer electronics accessories is much less market, the acquisition of DBL makes us lead- price sensitive and offers stronger growth rates ers in the independent retail market,” said Keith than core CE product areas. Bradley, president, Ingram Micro North Ameri- Ingram Micro expanded its consumer ca. “This acquisition provides us with a comple- electronics position last year when it acquired mentary portfolio of products and services for certain net assets of AVAD, a distributor of home a new and expansive customer base. We plan technology integration solutions for custom to leverage this opportunity by cross-selling installers in the U.S. AVAD was a privately held our current selection of information technology alliance of 12 companies employing 280 people products to DBL’s customers as well as offer our throughout the U.S. AVAD reported sales of $200 customers access to DBL’s extensive CE acces- million in 2004 and served 8,000 dealers through sory products.” 28 multi-functional facilities that combined Bradley added that DBL Distributing will product showrooms, distribution centers, train- operate as a wholly owned subsidiary of Ingram ing locations and will-call capabilities under one Micro Inc., maintaining the same brand name, roof. Its product portfolio included vendors in business model and management structure to the high-end consumer electronics market. ease the transition for customers and vendor “Our acquisition of DBL Distributing is partners of both companies. another step forward in Ingram Micro’s con- As part of this transaction, Ingram Micro sumer electronics strategy,” said Greg Spierkel, has also purchased NXG Technology, DBL’s own CEO, Ingram Micro Inc. “This strategy positions private-label brand of custom audio and video Ingram Micro at the forefront of two significant installation products. The NXG brand includes trends: the continuing convergence of commer- two complete lines of audio/video cables, three cial and consumer technologies and the growing complete lines of in-wall and indoor/outdoor speakers and a complete offering of in-wall vol- ume controls and A/V selectors. Modern Questions, comments, article proposals, address changes Distribution or subscription service to: Gale Media, Inc., 2737 Mapleton Avenue, “DBL will benefit significantly as a wholly Management #201, Boulder, CO 80304. Tel: 303-443-5060. Fax: 303-443-5059. Website: http://www.mdm.com owned subsidiary of Ingram Micro as it gains Founded in 1967 instant visibility and access to vendors and cus- by J. Van Ness Philip ISSN 0544-6538 tomers worldwide,” said David Lorsch, presi- To subscribe to Modern Distribution Management, please call dent and CEO of DBL Distributing. “In addition, 888-742-5060, email [email protected] or http://www.mdm.com. Subscriptions are available by online delivery and/or first-class mail. DBL can leverage Ingram Micro’s availability Published twice monthly; $345/yr., $365 U.S. funds other of capital and world class logistics resources to countries; $169 each additional subscription to a company ($189 other countries). equip its infrastructure to continue DBL’s legacy of growth.” Copyright © 2007 by Gale Media, Inc. All rights reserved. Modern Distribution Management® and mdm® are registered trademarks of Investment banking firm Vetus Partners Gale Media, Inc. Material may not be reproduced in whole or in part served as financial advisor to DBL for the trans- in any form whatsoever without permission from the publisher. To request permission to copy, republish, or quote material, please call action. 303-443-5060.

Copying or reprinting all or parts of this newsletter without specific permission violates federal law! www.mdm.com