The Wire: A Closer Look at M&A in Chemicals and Materials, Manufacturing, and Distribution

What’s in this Issue

For 2018, we’re focusing the Watermark Wire on industries where we have seen the most momentum in recent years: Chemicals & Materials, Manufacturing and Distribution. With each industry, we’re selecting a leader and sharing the strategies behind their current success story. In this issue, we’ve also compared and contrasted the recent performance of publicly traded micro, small, mid and large cap companies in each of the highlighted industries. Finally, we’ve shared recent M&A transactions by both strategic and private equity firms in these industries.

Table of Contents

  1. Chemicals & Materials
    (Commodity, Diversified, Fertilizers & Agricultural, Industrial, Specialty)

    1. Spotlight: Chase Corporation
    2. US Publicly Traded Companies Financial Performance
    3. Strategic M&A Activity in 2017 (Aggregates Tables, Selected Transactions)
    4. Private Equity M&A Activity in 2017
  2. Manufacturing: Machinery
    (Construction Machinery & Heavy Trucks, Agricultural & Farm Equipment, Industrial Machinery)

    1. Spotlight: Graco Inc.
    2. US Publicly Traded Companies Financial Performance
    3. Strategic M&A Activity in 2017 (Aggregates Tables, Selected Transactions)
    4. Private Equity M&A Activity in 2017
  3. Trading Companies and Distributors
    (Building Products, Chemicals, Construction Materials, Electrical Equipment, Machinery, Machinery Rental & Leasing, Paper & Forest Products, Transportation Equipment & Supplies)

    1. Spotlight: MSC Industrial Direct
    2. US Publicly Traded Companies Financial Performance
    3. Strategic M&A Activity in 2017 (Aggregates Tables, Selected Transactions)
    4. Private Equity M&A Activity in 2017
  4. About Watermark Advisors



Advanced Materials: Chemicals

(Commodity, Diversified, Fertilizers & Agricultural, Industrial, Specialty)

Spotlight: Chase Corporation

Chase Coporation

Leader in Chemicals: Chase Corporation (AMEX: CCF)
Founded in 1946 and headquartered in Westwood, MA, Chase Corporation is a leading manufacturer of chemicals and protective materials for high-reliability applications across a broad range of market sectors. Within the industrial materials market (80% of revenues), it manufactures superabsorbent polymers, adhesive and sealant systems, insulating and conducting materials, tapes, and moisture protective coatings, among other materials. End markets include: electronics, consumer & packaging, cable, telecom, utilities, medical, bridge & highway, water, auto and energy infrastructure. The last four of these are markets for their construction materials as well. Their construction materials (20% of revenues) include protective pipe coating tapes, protectants for bridge decks, and asphalt additives, among others. The company owns 16 manufacturing sites and employs 750 people.

Chase has enviable financial performance. Revenues grew from $148.9MM in 2012 to $252.6MM in 2017, an 11.1% CAGR. Meanwhile, Gross Margins improved from 32% to 42.2%. Adjusted EBITDA Margins improved from 16.8% to 29.3%, a 24.2% CAGR. Return on Equity improved from 9.8% to 21.8%. Free cash flow experienced a CAGR of 41.1%, from $8.7MM to $48.7MM.

Adam Chase
Adam Chase
CEO & President
Chase Corporation

The company is led by CEO & President Adam Chase and father Peter Chase as Executive Chairman. The overall strategy of Chase is to stick close to their core competitive advantages with a combination of organic and acquisition growth strategies. Adam Chase sees their primary competitive advantage as being a “reliable supplier with a long track record of producing and delivering high-quality value-added products.”

Trade secrets (not IP) are important to their success. They have focused on specialty chemicals and divested lower-margined, non-strategic businesses. In fact, they divested 4 businesses since 2010 for a total of $26.58MM in transaction value. They have also made 6 acquisitions of companies totaling $221.58MM in transaction value. They are a consolidator within their industry. They maintain a cross-functional team made up of senior management and outside consultants. They identify fitting deals by taking a “hunter” approach, where they utilize an acquisition target pipeline list and approach the targets themselves, while also seeking live transactions through the investment banking community. They pride themselves on their integration execution and appear to take an approach where they integrate their own controls and systems into acquired businesses fairly quickly. Their most recent acquisition was in January 2018 when they closed on Stewart Superabsorbents, LLC, in a $71.38MM purchase.

The reason Chase acquired Stewart Superabsorbents (“SSA”) is Chase’s “desire to invest in specialty chemical opportunities where products provide attributes of protection at a low cost and high value” (Adam Chase). Incorporated in 1999 and headquartered in Hickory, North Carolina, SSA supplies superabsorbent polymers (SAP) for specialty applications. The company provides technical support for research, development, design testing, and product implementation to both end users and component suppliers that want to add superabsorbent functionalities to their products. This acquisition offered Chase diversified products in medical, consumer, environmental and construction applications. The transaction did not involve an auction; rather the two companies have a decades-old relationship and saw the benefits of merging. One of the owners of SSA was retiring, and he saw a sale of Stewart as a way to scale back a portfolio of business that he had been running.

Sources: Capital IQ (data and interview transcripts) and Company Management Presentations

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US Publicly Traded Companies Financial Performance

Top 10 Large Cap Companies: Market Cap > $10 billion (Currency: USD)

Company Mkt Cap (USD in MM) TEV (USD in MM) Tot Rev, 1Y Gr % EBITDA, 1Y Gr % EBIT, 1Y Gr % Fwd P/E Gross Margin % EBITDA Margin % EBIT Margin % Net Inc Margin % Debt / Capital TEV/Tot Rev TEV/EBITDA TEV/EBIT
DowDuPont Inc. $170,624 $192,009 29.7 29.5 24.9 17.84x 23.2 18.0 11.7 2.3 25.1 3.07x 16.02x 23.70x
Monsanto Company $53,663 $58,743 5.1 3.2 3.5 21.26x 54.8 28.3 23.2 16.4 55.1 4.01x 14.25x 17.40x
Praxair, Inc. $44,555 $53,442 8.6 7.0 7.7 23.52x 43.6 32.2 21.9 10.9 58.0 4.67x 14.32x 20.97x
Ecolab Inc. $37,794 $44,976 5.2 2.7 2.0 24.53x 46.8 21.3 14.9 10.9 48.8 3.25x 15.26x 21.83x
The Sherwin-Williams Company $37,428 $48,170 26.4 8.4 -0.6 20.98x 45.3 14.3 11.8 11.8 80.0 3.21x 22.48x 27.24x
Air Products and Chemicals, Inc. $35,965 $36,503 13.3 7.3 8.6 22.08x 29.5 31.2 20.8 33.5 25.7 4.28x 13.45x 19.98x
PPG Industries, Inc. $29,351 $32,117 3.4 -0.6 -1.6 17.75x 44.4 17.1 14.0 10.8 42.2 2.18x 12.67x 15.48x
Eastman Chemical Company $14,792 $21,367 6.0 1.2 1.2 12.25x 25.8 22.4 16.3 15.4 56.8 2.24x 9.98x 13.76x
Celanese Corporation $14,118 $17,582 13.9 6.9 7.5 12.17x 24.7 20.8 15.8 13.7 52.5 2.86x 12.04x 15.25x
Westlake Chemical Corporation $14,390 $17,191 58.4 76.1 84.2 13.55x 22.0 22.8 15.7 16.2 41.7 2.14x 9.38x 13.62x

Top 10 Mid Cap Companies: Market Cap between $2 billion and $10 billion (Currency: USD)

Company Mkt Cap (USD in MM) TEV (USD in MM) Tot Rev, 1Y Gr % EBITDA, 1Y Gr % EBIT, 1Y Gr % Fwd P/E Gross Margin % EBITDA Margin % EBIT Margin % Net Inc Margin % Tot Debt/Capital % TEV/Tot Rev TEV/EBITDA TEV/EBIT
CF Industries Holdings, Inc. $10,293 $17,255 12.1 -10.6 -59.9 43.72x 10.4 26.8 5.4 8.7 41.2 4.18x 15.45x 73.74x
Huntsman Corporation $8,131 $9,948 -13.5 16.0 39.8 12.79x 21.7 14.6 10.8 7.6 40.5 1.19x 8.08x 10.91x
RPM International Inc. $6,727 $8,619 6.5 2.0 0.6 15.59x 42.8 13.0 10.6 6.8 58.4 1.67x 12.80x 15.65x
Olin Corporation $5,548 $8,941 12.9 11.9 24.4 15.56x 11.6 14.9 6.0 8.8 56.7 1.43x 9.52x 23.54x
The Scotts Miracle-Gro Company $5,192 $6,925 5.4 4.4 3.8 19.86x 36.5 19.0 16.2 9.9 77.8 2.61x 14.17x 16.69x
NewMarket Corporation $5,057 $5,576 7.3 -3.8 -7.1 19.16x 29.2 17.8 15.3 8.7 50.1 2.54x 14.22x 16.56x
W. R. Grace & Co. $4,584 $5,983 7.4 4.3 1.9 18.01x 38.6 23.0 16.5 0.7 85.4 3.49x 14.24x 19.38x
Ashland Global Holdings Inc. $4,444 $6,782 32.7 81.2 833.3 21.61x 28.4 16.7 8.2 -0.1 46.4 2.00x 11.96x 24.22x
Cabot Corporation $3,992 $4,877 16.8 5.6 9.0 15.42x 23.8 17.9 12.4 2.3 39.2 1.73x 9.52x 13.70x
Trinseo S.A. $3,552 $4,291 19.7 13.0 12.9 9.47x 14.7 11.9 9.5 7.4 63.5 0.96x 6.57x 7.88x

Top 10 Small Cap Companies: Market Cap between $250 million and $2 billion (Currency: USD)

Company Mkt Cap (USD in MM) TEV (USD in MM) Tot Rev, 1Y Gr % EBITDA, 1Y Gr % EBIT, 1Y Gr % Fwd P/E Gross Margin % EBITDA Margin % EBIT Margin % Net Inc Margin % Tot Debt/Capital % TEV/Tot Rev TEV/EBITDA TEV/EBIT
Quaker Chemical Corporation $2,012 $1,988 8.3 1.6 2.0 25.38x 35.8 13.4 11.0 5.9 13.9 2.48x 18.03x 21.95x
Valhi, Inc. $1,981 $3,649 24.8 857.3 NM 10.07x 28.9 16.7 13.4 4.1 64.6 1.97x 11.80x 14.67x
Ferro Corporation $1,891 $2,541 15.2 7.0 4.1 15.20x 30.0 14.0 10.3 3.4 66.6 1.95x 13.89x 19.00x
Stepan Company $1,741 $1,711 9.0 8.1 8.2 15.30x 17.6 11.7 7.8 4.8 26.6 0.89x 7.59x 11.47x
Kraton Corporation $1,455 $3,014 12.4 20.3 29.0 13.19x 27.9 17.6 10.6 5.0 70.8 1.54x 8.73x 14.48x
Terra Nitrogen Company, L.P. $1,564 $1,547 -5.1 -28.2 -33.5 0.00x 39.4 45.2 35.1 28.1 0.0 3.90x 8.64x 11.12x
A. Schulman, Inc. $1,285 $2,260 3.6 -10.9 -13.2 17.87x 15.2 7.8 4.7 1.8 80.5 0.89x 11.49x 18.77x
MPM Holdings Inc. $1,251 $2,306 4.4 110.2 NM 0.00x 21.5 10.6 4.0 0.0 69.3 0.99x 9.30x 24.53x
Calgon Carbon Corporation $1,087 $1,304 17.4 -1.9 -28.0 31.09x 30.5 13.6 5.9 1.0 37.5 2.19x 16.13x 37.39x
Chase Corporation $1,023 $969 4.6 8.9 9.7 0.00x 41.7 28.3 22.7 15.8 0.0 3.83x 13.50x 16.86x

Top 10 Micro Cap Companies: Market Cap less than $250 million (Currency: USD)

Company Mkt Cap (USD in MM) TEV (USD in MM) Tot Rev, 1Y Gr % EBITDA, 1Y Gr % EBIT, 1Y Gr % Fwd P/E Gross Margin % EBITDA Margin % EBIT Margin % Net Inc Margin % Tot Debt/Capital % TEV/Tot Rev TEV/EBITDA TEV/EBIT
Cardinal Ethanol, LLC $204 $204 1.3 -34.1 -58.1 0.00x 6.2 8.5 3.6 3.4 14.7 0.90x 10.57x 25.23x
LSB Industries, Inc. $204 $731 11.8 NM NM NM 1.6 10.4 -6.4 -12.2 40.1 1.72x 16.51x NM
Advanced Emissions Solutions, Inc. $203 $176 -35.6 NM NM 5.60x 10.5 -35.5 -37.8 249.4 0.0 4.54x 4.65x 4.76x
Core Molding Technologies, Inc. $148 $128 -0.4 -7.6 -13.7 0.00x 15.6 9.7 5.9 3.9 6.8 0.75x 7.70x 12.56x
Marrone Bio Innovations, Inc. $116 $173 32.2 NM NM NM 40.8 -123.1 -134.9 -178.8 363.5 9.84x NM NM
Aspen Aerogels, Inc. $107 $100 -5.2 NM NM NM 16.7 -7.5 -17.1 -17.3 3.6 0.90x NM NM
EcoSynthetix Inc. $130 $67 51.2 NM NM NM 21.0 -37.7 -45.2 -42.1 0.0 3.08x NM NM
Senomyx, Inc. $61 $54 -25.9 NM NM NM -1.6 -61.5 -65.4 -65.1 0.0 2.89x NM NM

* Equity related values are as of previous business day’s stock market close.

TEV (Total Enterprise Value) is an economic measure reflecting the market value of a business. It is a sum of claims by all claimants: creditors (secured and unsecured) and shareholders (preferred and common).

Source: S&P Capital IQ
Historical Equity Pricing Data supplied by Interactive Data Pricing and Reference Data LLC

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Strategic M&A Activity in 2017

Aggregate summaries of the most active acquires and disclosed transactions within the industry

Most Active Strategic Acquirers

Company Name Number Of Transactions
AMVAC Chemical Corporation 3
H.B. Fuller Company (NYSE:FUL) 3
Creative Pultrusions, Inc. 2
Finzer Roller, Inc. 2
NC Brands L.P. 2
Sigma-Aldrich Corporation 2
Sun Chemical Corporation 2
Timac AGRO USA, Inc. 2
Yamaha Marine Systems Company 2
AMCO Polymers, LLC 1

Largest Dollar Volume of Acquisitions

Company Name Total Transaction Size ($MM)
NOVA Chemicals Inc. $2,100.00
ExxonMobil Chemical Company, Inc. $1,788.00
H.B. Fuller Company (NYSE:FUL) $1,697.05
Teijin Holdings USA, Inc. $825.00
Ashland LLC $660.00
Nippon Paint (USA) Inc. $608.00
SWM Luxembourg S.à.r.l $335.00
SWM Europe S.à.r.l. $335.00
DelStar Technologies, Inc. $335.00
Chase Corporation (AMEX:CCF) $71.38

Summary of Average M&A Market in Industry

Valuation Summary Valuation (USD in MM)
Total Deal Value($mm): $8,228.18
Average TEV/Revenue: 1.956x
Average TEV/EBITDA: 11.176x

Disclosed Deal Values

Number of Deals by Transaction Ranges Deals
Greater than $1 billion 3
$500 – $999.9mm 3
$100 – $499.9mm 2
Less than $100mm 9
Undisclosed 63

Selected Transactions

M&A Closed Date Buyers/Investors Business Description [Buyers/Investors] Target/Issuer Total Transaction Value ($USD IN MM) Implied Enterprise Value/Revenues (x) Implied Enterprise Value/EBITDA (x) Implied Enterprise Value/EBIT (x) Transaction Comments
12/26/2017 OCIP Holding LLC OCIP Holding LLC manufactures gum and wood chemicals. OCI Partners LP (NYSE:OCIP) $61.12 4.55x 13.53x 32.54x OCIP Holding LLC acquired 6.3% stake in OCI Partners LP (NYSE:OCIP) from certain minority unit holders for $61.1 million on December 26, 2017.
12/11/2017 Italmatch USA Corporation Italmatch USA Corporation manufactures and distributes additives for lubricants and water treatment industries. Detrex Corporation $46.04 1.18x 12.09x 18.73x Italmatch USA Corporation entered into a definitive agreement to acquire Detrex Corporation (OTCQX:DTRX.PK) for approximately $46 million on November 10, 2017.
11/17/2017 Honor Plastics & Molding Inc. Honor Plastics & Molding Inc. manufactures plastic injection molding parts. Kowalski Molding Service Inc. $2.00 2x Honor Plastics & Molding Inc. acquired Kowalski Molding Service Inc. for $2 million on November 17, 2017.
11/06/2017 H.B. Fuller Company (NYSE:FUL) H.B. Fuller Company, together with its subsidiaries, formulates, manufactures, and markets adhesives, sealants, and other specialty chemical products worldwide. ADECOL Industria Química LTDA. $0.05 0.001x 8x H.B. Fuller Company (NYSE:FUL) signed an agreement to acquire ADECOL Industria Química LTDA. for BRL 0.15 million on July 18, 2017.
10/20/2017 H.B. Fuller Company (NYSE:FUL) H.B. Fuller Company, together with its subsidiaries, formulates, manufactures, and markets adhesives, sealants, and other specialty chemical products worldwide. Royal Adhesives & Sealants, LLC $1,575.00 H.B. Fuller Company (NYSE:FUL) signed an agreement to acquire Royal Adhesives & Sealants, LLC from American Securities for $1.6 billion on September 2, 2017.
08/27/2017 ExxonMobil Chemical Company, Inc. ExxonMobil Chemical Company, Inc. produces and supplies petrochemical products for customers in the United States and internationally. Jurong Aromatics Corporation Pte Ltd $1,788.46 ExxonMobil Chemical Company, Inc. agreed to acquire Jurong Aromatics Corporation Pte Ltd for KRW 2 trillion on May 10, 2017.
07/06/2017 NOVA Chemicals Inc. NOVA Chemicals Inc. develops and manufactures plastics and chemicals. Williams Olefins, L.L.C. $2,100.00 NOVA Chemicals Inc. signed an agreement to acquire Williams Olefins, L.L.C. from Williams Field Services Group, LLC for $2.1 billion in cash on April 13, 2017.
06/13/2017 Loveland Products, Inc. Loveland Products, Inc. provides high performance input products for agricultural and professional non-crop industries. Starpharma Holdings Limited, Agrochemical Polymer Technology Business $26.39 Loveland Products, Inc. acquired Agrochemical Polymer Technology Business of Starpharma Holdings Limited (ASX:SPL) for AUD 35 million on June 13, 2017.
05/17/2017 Ashland LLC Ashland LLC manufactures and markets specialty chemicals. Pharmachem Laboratories, Inc. $660.00 2.2x Ashland LLC entered into a definitive stock purchase agreement to acquire Pharmachem Laboratories, Inc. for $660 million on April 14, 2017.
03/01/2017 Nippon Paint (USA) Inc. Nippon Paint (USA) Inc., through its subsidiaries, manufactures and distributes paints, coatings, and fine chemicals for various companies in the United States and internationally. Dunn-Edwards Corporation $608.00 1.74x Nippon Paint (USA) Inc. entered into an agreement to acquire Dunn-Edwards Corporation from Edwards Family and Dunn-Edwards Corporation Employees Stock Ownership Plan in cash on December 22, 2016.
01/27/2017 H.B. Fuller Company (NYSE:FUL) H.B. Fuller Company, together with its subsidiaries, formulates, manufactures, and markets adhesives, sealants, and other specialty chemical products worldwide. H.E. Wisdom & Sons, Inc. $122.00 1.22x 11.09x H.B. Fuller Company (NYSE:FUL) acquired H.E. Wisdom & Sons, Inc. from Wisdom family for approximately $122 million on January 27, 2017.
01/20/2017 DelStar Technologies, Inc.; SWM Luxembourg S.à.r.l; SWM Europe S.à.r.l. DelStar Technologies, Inc.
DelStar Technologies, Inc. manufactures thermoplastic nets, nonwovens, laminates, and extruded components for filtration, automotive, healthcare, industrial, food, electronics, and textile markets.

SWM Luxembourg S.à.r.l
SWM Luxembourg S.à.r.l is a holding company. The company, through its subsidiaries, manufactures plastic products.”

Conwed Plastics, LLC $335.00 2.39x DelStar Technologies, Inc., SWM Luxembourg S.à.R.L., SWM Europe S.à.r.l. signed equity interest purchase agreement to acquire Conwed Plastics, LLC from Baldwin Enterprises, Inc. for approximately $335 million on December 14, 2016.
01/03/2017 Teijin Holdings USA, Inc. Teijin Holdings USA, Inc., through its subsidiaries, manufactures carbon fiber reinforced thermoplastic products and aramid fibers and related products. Continental Structural Plastics Inc. $825.00 1.3x Teijin Holdings USA Inc. agreed to acquire Continental Structural Plastics Inc from consortium of investors on August 1, 2016. Teijin signed a definitive agreement to acquire Continental Structural Plastics Inc for approximately $825 million on September 13, 2016.

Source: S&P Capital IQ

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Private Equity M&A Activity in 2017

M&A Closed Date Buyers/Investors Business Description [Buyers/Investors] Target/Issuer Total Transaction Value ($USD IN MM) Implied Enterprise Value/Revenues (x) Implied Enterprise Value/EBITDA (x) Implied Enterprise Value/EBIT (x) Transaction Comments
11/17/2017 Rayonier Advanced Materials Inc. (NYSE:RYAM) Rayonier Advanced Materials Inc. manufactures and sells cellulose specialty products in the United States, China, Japan, Canada, Europe, Latin America, other Asian countries, and internationally. Tembec Inc. $967.59 0.834x 5.96x 8.18x Rayonier Advanced Materials, Inc. (NYSE:RYAM) (‘Rayonier’) entered into an arrangement agreement to acquire Tembec, Inc. (TSX:TMB) from Fairfax Financial Holdings Ltd. (TSX:FFH), Oaktree Capital Management, L.P., Restructuring Capital Associates Lp and other shareholders for approximately CAD 430 million on May 24, 2017.
11/07/2017 Encapsys, LLC Encapsys, LLC develops microencapsulation solutions for paints and coatings, agriculture, oil and gas, adhesives and sealants, personal and household care, and paper industries. IPS Corporation $700.00 Encapsys, LLC acquired IPS Corporation from Nautic Partners, LLC and others for $700 million on November 7, 2017.
11/03/2017 Innophos Holdings, Inc. (NasdaqGS:IPHS) Innophos Holdings, Inc., through its subsidiaries, produces performance-critical and nutritional specialty ingredients with applications in food, beverage, dietary supplements, pharmaceutical, oral care, and industrial end markets. NutraGenesis, LLC $28.00 2.33x Innophos Holdings, Inc. (NasdaqGS:IPHS) acquired NutraGenesis, LLC for $28 million on November 3, 2017.
11/01/2017 Ferro Corporation (NYSE:FOE) Ferro Corporation produces specialty materials in the United States and internationally. Endeka Ceramics, S.A.U. $74.89 Ferro Corporation (NYSE:FOE) entered into a definitive agreement to acquire Endeka Ceramics, S.A.U. for €63.8 million on October 2, 2017.
08/31/2017 DowDuPont Inc. (NYSE:DWDP) DowDuPont Inc., through its subsidiaries, engages in agriculture, materials science, and specialty products businesses worldwide. E. I. du Pont de Nemours and Company $72,632.89 2.14x 12.32x 17.26x The Dow Chemical Company (NYSE:DOW) entered into a definitive agreement to acquire E. I. du Pont de Nemours and Company (NYSE:DD) in a merger of equals transaction for approximately $72.6 billion in stock on December 11, 2015.
08/25/2017 Innophos Holdings, Inc. (NasdaqGS:IPHS) Innophos Holdings, Inc., through its subsidiaries, produces performance-critical and nutritional specialty ingredients with applications in food, beverage, dietary supplements, pharmaceutical, oral care, and industrial end markets. Novel Ingredient Services, LLC $125.10 1.25x Innophos Holdings, Inc. (NasdaqGS:IPHS) entered into a definitive merger agreement to acquire Novel Ingredient Services, LLC from GenNx360 Capital Partners II, L.P. managed by GenNx360 Capital Partners and other shareholders for approximately $125.1 million on July 28, 2017.
06/15/2017 KMG Chemicals, Inc. (NYSE:KMG) KMG Chemicals, Inc., through its subsidiaries, manufactures, formulates, and distributes specialty chemicals and performance materials worldwide. Flowchem Ltd. $495.00 11.51x KMG Chemicals, Inc. (NYSE:KMG) signed a definitive agreement to acquire Flowchem Ltd. from Arsenal Capital Partners III-B, LP, fund managed by Arsenal Capital Partners for approximately $500 million on April 23, 2017.
06/01/2017 Axalta Coating Systems Ltd. (NYSE:AXTA) Axalta Coating Systems Ltd., through its subsidiaries, manufactures, markets, and distributes coatings primarily for the transportation industry. The Valspar Corporation, Valspar Wood $420.00 1.87x Axalta Coating Systems Ltd. (NYSE:AXTA) entered into an asset purchase agreement to acquire Valspar Wood from The Valspar Corporation (NYSE:VAL) for $420 million on April 11, 2017.
06/01/2017 The Sherwin-Williams Company (NYSE:SHW) The Sherwin-Williams Company develops, manufactures, distributes, and sells paints, coatings, and related products to professional, industrial, commercial, and retail customers primarily in North and South America, the Caribbean, Europe, and Asia. The Valspar Corporation $11,454.95 2.65x 16.21x 18.67x The Sherwin-Williams Company (NYSE:SHW) entered into a definitive agreement to acquire The Valspar Corporation (NYSE:VAL).
05/18/2017 Reichhold LLC 2 Reichhold LLC 2 manufactures and supplies unsaturated polyester resins, vinyl ester resins, and coating resins for the composite and coating industries. Polynt Group Sarl $797.22 Reichhold LLC 2 entered into definitive agreement to acquire Polynt Group Sarl. from funds managed by InvestIndustrial for €700 million on May 10, 2016.
05/17/2017 GCP Applied Technologies Inc. (NYSE:GCP) GCP Applied Technologies Inc. produces and sells specialty construction chemicals, specialty building materials, and packaging sealants and coatings worldwide. Stirling Lloyd Polychem Limited $94.00 2.35x GCP Applied Technologies Inc. (NYSE:GCP) signed a definitive agreement to acquire Stirling Lloyd Polychem Limited for $94 million on May 8, 2017.
02/01/2017 Ecolab Inc. (NYSE:ECL) Ecolab Inc. provides water, hygiene, and energy technologies and services for customers worldwide. Laboratoires Anios S.A. $833.47 3.41x Ecolab Inc. (NYSE:ECL) made a binding offer to acquire Laboratoires Anios S.A. from Ardian, Bertrand Letartre and Thierry Letartre on June 29, 2016.

Source: S&P Capital IQ

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Manufacturing: Machinery

(Construction Machinery & Heavy Trucks, Agricultural & Farm Equipment, Industrial Machinery)

Spotlight: Graco Inc.

Graco Inc.

Manufacturing Leader – Graco Inc. (NYSE: GGG)
As we look at companies with successful M&A history, among the U.S.-based publicly traded equipment manufacturers, we want to spotlight Graco Inc., a flow control equipment company. Much can be learned by studying Graco’s strategies and practices.

Graco specializes in making pumps and equipment to atomize fluids, in particular equipment that is used for hard-to-handle, corrosive, abrasive, or sticky fluids. These fluids often contain abrasive additives such as sand, or grit, or in some cases even rock. Graco also makes equipment that can spray and atomize these complex fluids. Graco emphasizes vertical integration and closely aligns their engineering resources with their manufacturing resources.

Graco Inc.
Graco specializes in making pumps and equipment to atomize fluids

To accelerate product development, Graco uses acquisitions as a key part of their product strategy. New products use core Graco technology, but push into adjacent application areas that Graco hasn’t served before. These are targets that allow them to leverage pre-existing channels and product capabilities, essentially adjacencies to existing businesses. They have closed 6 acquisitions since 2012, including deals as small as $1MM, and up to $160MM in enterprise value. The company anticipates that 2/3 of their top line growth will be organic and 1/3 from acquisitions.

Another distinguishing practice of Graco is that they put 4.6% of sales back into R&D, versus 1.7% by industry peers.

Graco has a market capitalization of $7.78Bn as of January 31, 2018. Its annual Return on Capital averaged 18.8% over the 5-year period from January 2013-December 2017. Total Revenues grew at a CAGR of 7.8% over the period. EBITDA margins are high, 27.5% in December 2017, with unlevered Free Cash Flow of 16%. Total Debt to Capital is 24.3%. The company is diversified between 3 markets: (1) Industrial, which grew from $603MM in 2012 to $692MM in 2017, (2) Process, which grew from $110MM to $294MM, and (3) the Contractor market, which grew from $299MM to $488MM. Revenues are geographically diversified as well between the US (52%), Europe-Middle East-Africa (23%), Asia Pacific (18%) and South America (7%).

Sources: Capital IQ (data and interview transcripts) and Company Management Presentations

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US Publicly Traded Companies Financial Performance

Top 10 Large Cap Companies: Market Cap > $10 billion (Currency: USD)

Company Mkt Cap (USD in MM) TEV (USD in MM) Tot Rev, 1Y Gr % EBITDA, 1Y Gr % EBIT, 1Y Gr % Fwd P/E Gross Margin % EBITDA Margin % EBIT Margin % Net Inc Margin % Debt / Capital TEV/Tot Rev TEV/EBITDA TEV/EBIT
Caterpillar Inc. $97,060 $124,628 18.0 71.9 196.0 17.93x 26.5 18.6 12.3 1.7 71.7 2.74x 14.72x 22.29x
Illinois Tool Works Inc. $56,000 $61,238 5.3 9.3 10.9 21.35x 42.0 27.0 23.7 11.8 64.5 4.28x 15.86x 18.02x
Deere & Company $53,738 $91,723 14.6 25.0 34.5 16.76x 23.3 16.0 10.5 4.7 81.4 3.02x 18.97x 28.75x
Cummins Inc. $28,003 $29,347 16.7 11.7 12.1 13.46x 24.9 12.6 9.8 4.9 19.7 1.44x 10.00x 12.47x
Parker-Hannifin Corporation $24,424 $29,343 19.2 32.1 28.7 17.22x 24.4 15.9 12.6 6.5 52.3 2.20x 13.58x 17.06x
PACCAR Inc $25,104 $30,459 14.2 9.6 10.1 13.13x 14.7 13.7 11.0 8.6 52.7 1.57x 11.44x 14.21x
Stanley Black & Decker, Inc. $24,680 $27,877 11.7 9.5 8.5 19.06x 37.8 16.1 12.5 9.6 31.6 2.19x 13.58x 17.50x
Fortive Corporation $26,829 $29,941 6.9 5.8 6.8 22.53x 49.6 23.0 20.4 15.7 51.6 4.50x 19.58x 22.10x
Dover Corporation $15,864 $18,678 15.2 24.5 31.7 20.00x 37.2 17.7 12.7 10.4 44.9 2.39x 13.45x 18.79x
Xylem Inc. $13,659 $15,461 24.8 32.5 25.2 26.02x 39.3 17.3 12.3 7.0 46.6 3.28x 18.97x 26.61x

Top 10 Mid Cap Companies: Market Cap between $2 billion and $10 billion (Currency: USD)

Company Mkt Cap (USD in MM) TEV (USD in MM) Tot Rev, 1Y Gr % EBITDA, 1Y Gr % EBIT, 1Y Gr % Fwd P/E Gross Margin % EBITDA Margin % EBIT Margin % Net Inc Margin % Tot Debt/Capital % TEV/Tot Rev TEV/EBITDA TEV/EBIT
Nordson Corporation $7,916 $9,369 19.8 23.8 22.3 21.50x 55.0 27.7 23.4 15.9 55.0 4.24x 15.32x 18.13x
Graco Inc. $7,625 $7,754 10.9 14.6 17.8 25.07x 53.8 27.5 24.4 17.1 24.3 5.26x 19.10x 21.51x
Westinghouse Air Brake Technologies Corporation $8,006 $9,616 32.4 -17.9 -13.8 21.73x 27.7 12.1 11.2 6.8 39.2 2.48x 20.46x 22.18x
The Middleby Corporation $7,512 $8,381 4.3 10.1 12.0 22.08x 39.7 23.4 20.7 13.2 42.0 3.64x 15.55x 17.62x
The Toro Company $6,838 $6,934 4.8 4.7 6.0 22.80x 36.7 16.8 14.2 9.7 35.2 2.73x 15.94x 18.67x
Oshkosh Corporation $6,231 $6,685 15.5 28.8 38.0 15.34x 17.6 9.4 7.6 4.5 26.6 0.93x 9.86x 12.12x
Gardner Denver Holdings, Inc. $6,455 $8,132 22.5 -9.3 -20.2 19.28x 37.8 12.6 5.3 0.8 58.4 3.42x 27.23x 65.11x
Donaldson Company, Inc. $6,299 $6,625 10.2 13.5 16.9 23.22x 34.6 17.0 13.9 9.6 43.2 2.69x 15.77x 19.20x
Lincoln Electric Holdings, Inc. $6,021 $6,222 15.4 1.4 0.8 19.43x 33.5 15.7 13.1 9.4 43.1 2.37x 15.04x 18.01x
Allison Transmission Holdings, Inc. $5,467 $7,814 22.9 36.0 51.3 8.07x 50.0 37.8 30.2 22.3 78.7 3.45x 9.15x 11.42x

Top 10 Small Cap Companies: Market Cap between $250 million and $2 billion (Currency: USD)

Company Mkt Cap (USD in MM) TEV (USD in MM) Tot Rev, 1Y Gr % EBITDA, 1Y Gr % EBIT, 1Y Gr % Fwd P/E Gross Margin % EBITDA Margin % EBIT Margin % Net Inc Margin % Tot Debt/Capital % TEV/Tot Rev TEV/EBITDA TEV/EBIT
Albany International Corp. $2,133 $2,469 10.8 -4.4 -15.0 25.88x 34.2 18.7 10.4 3.8 47.4 2.86x 15.28x 27.54x
EnPro Industries, Inc. $1,621 $2,050 10.3 11.5 11.3 19.82x 33.9 12.6 7.7 41.2 40.7 1.57x 12.42x 20.26x
Mueller Water Products, Inc. $1,794 $1,928 4.0 -0.3 -1.8 19.62x 32.4 18.1 13.3 20.5 47.4 2.30x 12.76x 17.32x
Sun Hydraulics Corporation $1,783 $1,815 61.2 66.3 61.9 31.00x 40.5 25.5 19.5 10.3 30.1 5.88x 23.07x 30.09x
ESCO Technologies Inc. $1,589 $1,832 21.9 15.2 8.3 21.48x 36.1 16.5 11.7 10.9 28.7 2.57x 15.59x 22.03x
Chart Industries, Inc. $1,815 $2,194 15.1 17.9 22.2 32.31x 28.0 10.9 6.7 2.8 38.2 2.22x 20.31x 33.19x
Harsco Corporation $1,617 $2,187 10.7 27.3 92.9 19.14x 24.0 17.3 9.2 0.5 73.2 1.36x 7.88x 14.81x
Altra Industrial Motion Corp. $1,304 $1,550 23.7 30.2 34.6 18.60x 31.7 14.3 10.2 5.9 42.9 1.77x 12.38x 17.38x
Actuant Corporation $1,446 $1,836 0.8 9.2 20.8 21.14x 34.6 11.3 7.5 -5.9 51.8 1.64x 14.53x 21.84x
The Greenbrier Companies, Inc. $1,530 $1,687 -10.4 -24.3 -29.9 12.50x 18.3 13.3 10.2 5.4 31.8 0.78x 6.09x 8.06x

Top 10 Micro Cap Companies: Market Cap less than $250 million (Currency: USD)

Company Mkt Cap (USD in MM) TEV (USD in MM) Tot Rev, 1Y Gr % EBITDA, 1Y Gr % EBIT, 1Y Gr % Fwd P/E Gross Margin % EBITDA Margin % EBIT Margin % Net Inc Margin % Tot Debt/Capital % TEV/Tot Rev TEV/EBITDA TEV/EBIT
Hardinge Inc. $239 $194 8.9 67.0 175.3 0.00x 33.8 7.1 4.3 1.8 0.0 0.61x 8.60x 14.22x
Gencor Industries, Inc. $237 $123 21.3 19.9 25.9 0.00x 25.1 13.1 11.8 10.7 0.0 1.40x 10.73x 11.88x
Graham Corporation $203 $129 -8.4 -27.6 -37.9 38.43x 23.5 6.9 4.1 -11.0 0.2 1.59x 22.98x 38.39x
FreightCar America, Inc. $196 $75 -21.3 NM NM NM 3.0 -1.7 -3.7 -2.4 0.0 0.16x NM NM
The Eastern Company $163 $177 33.6 40.6 52.4 0.00x 25.1 10.3 8.0 4.3 28.9 0.96x 9.31x 11.99x
The ExOne Company $140 $124 5.7 NM NM NM 27.3 -23.5 -35.7 -39.5 2.2 2.37x NM NM
Manitex International, Inc. $173 $271 37.2 46.4 NM 30.79x 17.0 2.9 1.1 -6.1 58.8 0.89x 30.08x 72.07x
Key Technology, Inc. $172 $171 17.3 44.0 147.8 0.00x 32.3 6.9 4.1 1.4 6.3 1.19x 17.33x 29.39x
ASV Holdings, Inc. $79 $105 12.8 10.7 19.0 20.25x 15.6 9.3 5.1 0.3 27.5 0.89x 9.58x 17.38x

* Equity related values are as of previous business day’s stock market close.

TEV (Total Enterprise Value) is an economic measure reflecting the market value of a business. It is a sum of claims by all claimants: creditors (secured and unsecured) and shareholders (preferred and common).

Source: S&P Capital IQ
Historical Equity Pricing Data supplied by Interactive Data Pricing and Reference Data LLC

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Strategic M&A Activity in 2017

Aggregate summaries of the most active acquires and disclosed transactions within the industry

Most Active Strategic Acquirers

Company Name Number Of Transactions
The Legacy Companies 3
CaliPharms, Inc. (OTCPK:KGET) 2
Krones Inc. 2
Park-Ohio Holdings Corp. (NasdaqGS:PKOH) 2
Riverside Tool Corporation 2
Singer MD, LLC 2
The Vollrath Company, LLC 2
Vanair Manufacturing, Inc. 2
Wilo USA LLC 2
Ace Industries, Inc. 1

Largest Dollar Volume of Acquisitions

Company Name Total Transaction Size ($MM)
Komatsu America Corp. $3,868.41
Kinderhook Industries $150.00
Dover Corporation (NYSE:DOV) $150.00
Electrolux Professional, Inc. $108.00
Pfeiffer Vacuum Inc. $68.00
Park-Ohio Holdings Corp. (NasdaqGS:PKOH) $41.00
Actuant Corporation (NYSE:ATU) $16.00
Alamo Industrial, Inc. $13.18
CaliPharms, Inc. (OTCPK:KGET) $1.75
Indev A.C.T. Gauging Systems $1.00

Summary of Average M&A Market in Industry

Valuation Summary Valuation
Total Deal Value($mm): $4,267.34
Average Deal Value: $474.15
Average TEV/Revenue: 1.148x
Average TEV/EBITDA: 14.671x

Disclosed Deal Values

Number of Deals by Transaction Ranges Deals
Greater than $1 billion 1
$500 – $999.9mm 0
$100 – $499.9mm 2
Less than $100mm 6
Undisclosed 101

Selected Transactions

Target/Issuer Total Transaction Value ($USD IN MM) Implied Enterprise Value/Revenues (x) Implied Enterprise Value/EBITDA (x) Implied Enterprise Value/EBIT (x) Transaction Comments
Mirage Machines Ltd. $16.00 1.33x Actuant Corporation (NYSE:ATU) signed a definitive agreement to acquire Mirage Machines Ltd. from Acteon Group Limited for $16 million on August 16, 2017.
R.P.M. Tech Inc. $13.18 0.668x Alamo Industrial, Inc. acquired R.P.M. Tech Inc. from Fiducie Familiale Piamvic, Fiducie Familiale Pouanneli and Gestion Iamvic Inc. for CAD 16.7 million on August 8, 2017.
Nor-Cal Products, Inc. $68.00 Pfeiffer Vacuum Inc. acquired Nor-Cal Products, Inc. from Endeavour Capital, Inc. and others for $68 million on June 22, 2017. The consideration is decided on a cash and debt-free basis.
Komatsu Mining Corp. $3,868.41 1.33x 14.67x 33.38x Komatsu America Corp. entered into a definitive agreement to acquire Joy Global, Inc. (NYSE:JOY) from The Vanguard Group, Inc., Kiltearn Partners LLP, BlackRock Institutional Trust Company, N.A., Invesco Advisers, Inc., Artisan Partners Limited Partnership and others for $2.8 billion in cash on July 21, 2016.
Grindmaster-Cecilware Corporation $108.00 1.66x “Electrolux Professional, Inc. acquired Grindmaster-Cecilware Corporation from BNY Mezzanine Partners L.P., managed by BNY Mellon-Alcentra Mezzanine Partners, and other shareholders for approximately $110 million in cash on March 2, 2017. Grindmaster-Cecilware had net sales in excess of $65 million in 2016.
Automation And Control Technology, Inc. $1.00 INDEV Gauging Systems Inc. acquired Automation And Control Technology, Inc. for $1 million on February 28, 2017.
Racing Winning Brands $150.00 Kinderhook Industries acquired Performance Motorsports, Inc. from Dover Corporation (NYSE:DOV) for $150 million on February 14, 2017.
GH Electrotermia S.A. $41.00 0.745x Park-Ohio Holdings Corp. (NasdaqGS:PKOH) acquired GH Electrotermia S.A. from Miura Fund I, FCR, a fund of Miura Private Equity, S.A., SGEIC and management team of GH Electrotermia for $41 million on January 9, 2017.

Source: S&P Capital IQ

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Private Equity M&A Activity in 2017

M&A Closed Date Buyers/Investors Business Description [Buyers/Investors] Target/Issuer Total Transaction Value ($USD IN MM) Implied Enterprise Value/Revenues (x) Implied Enterprise Value/EBITDA (x) Implied Enterprise Value/EBIT (x) Transaction Comments
12/11/2017 CIRCOR International, Inc. (NYSE:CIR) CIRCOR International, Inc. designs, manufactures, and markets engineered products and sub-systems for oil and gas, aerospace, power and process, and industrial solutions markets worldwide. Fluid Handling Business $860.34 1.86x 12.47x CIRCOR International, Inc. (NYSE:CIR) (‘CIRCOR’) signed a definitive agreement to acquire the fluid handling business (‘CFH business’) of Colfax Corporation (NYSE:CFX), Allweiler Group GmbH, Esab Mexico S.A. de C.V., CAST Limited and Esab Sweden Holdings AB for approximately $860 million on September 24, 2017.
12/01/2017 Deere & Company (NYSE:DE) Deere & Company, together with its subsidiaries, manufactures and distributes agriculture and turf, and construction and forestry equipment worldwide. WIRTGEN GROUP Holding GmbH $5,019.63 1.72x Deere & Company (NYSE:DE) signed an agreement to acquire Wirtgen Group Holding GmbH for €4.6 billion on May 31, 2017.
10/18/2017 Fortive Corporation (NYSE:FTV) Fortive Corporation designs, develops, manufactures, markets, and services professional and engineered products, software, and services worldwide. It operates in two segments, Professional Instrumentation and Industrial Technologies. Landauer, Inc. $761.78 4.83x 16.97x 22.45x Fortive Corporation (NYSE:FTV) entered into a definitive agreement to acquire Landauer, Inc. (NYSE:LDR) from Gilead Capital LP and other shareholders for approximately $761 million on September 6, 2017.
09/27/2017 Wabash National Corporation (NYSE:WNC) Wabash National Corporation operates as a diversified industrial manufacturer and North America’s producer of semi-trailers and liquid transportation systems. Supreme Industries, Inc. $367.38 1.13x 13.2x 14.99x Wabash National Corporation (NYSE:WNC) (‘Wabash’) entered into a definitive agreement to acquire Supreme Industries, Inc. (AMEX:STS) for approximately $367 million on August 8, 2017.
08/25/2017 Fortive Corporation (NYSE:FTV) Fortive Corporation designs, develops, manufactures, markets, and services professional and engineered products, software, and services worldwide. It operates in two segments, Professional Instrumentation and Industrial Technologies. Industrial Scientific Corporation $600.00 3.85x Fortive Corporation (NYSE:FTV) entered into a definitive agreement to acquire Industrial Scientific Corporation from McElhattan family for $600 million on July 27, 2017.
07/05/2017 Kadant Inc. (NYSE:KAI) Kadant Inc. supplies equipment and components used in papermaking, paper recycling, recycling and waste management, and other process industries worldwide. NII FPG Company $173.00 2.14x 8.24x Kadant Inc. (NYSE:KAI) entered into a stock and asset purchase agreement to acquire NII FPG Company for approximately $173 million on May 24, 2017.
07/03/2017 The Timken Company (NYSE:TKR) The Timken Company engineers, manufactures, and markets bearings, transmissions, gearboxes, belts, chains, couplings, and related products worldwide. Groeneveld Groep B.V. $280.00 2.67x The Timken Company (NYSE:TKR) entered into an agreement to acquire Groeneveld Groep B.V. from Henk Groeneveld for $280 million on June 27, 2017.
06/02/2017 Federal Signal Corporation (NYSE:FSS) Federal Signal Corporation, together with its subsidiaries, designs, manufactures and supplies a suite of products and integrated solutions for municipal, governmental, industrial and commercial customers in the United States, Canada, Europe, and internationally. Truck Bodies & Equipment International, Inc. $270.00 1.31x 7.2x Federal Signal Corporation (NYSE:FSS) entered into an agreement to acquire Truck Bodies & Equipment International, Inc. (‘TBEI’) from GenNx360 Capital Partners II, L.P. managed by GenNx360 Capital Partners and other shareholders for $270 million on May 8, 2017.
04/06/2017 Tennant Company (NYSE:TNC) Tennant Company designs, manufactures, and markets cleaning solutions. IP Cleaning S.p.A. $350.00 1.72x 11.83x Tennant Company (NYSE:TNC) signed a definitive agreement to acquire IP Cleaning S.p.A. from a consortium of sellers for $350 million on February 22, 2017.
03/31/2017 Nordson Corporation (NasdaqGS:NDSN) Nordson Corporation engineers, manufactures, and markets products and systems to dispense, apply, and control adhesives, coatings, polymers, sealants, biomaterials, and other fluids. Vention Medical, Inc., Advanced Technologies Business $716.50 4.78x 14.93x Nordson Corporation (NasdaqGS:NDSN) entered into a definitive agreement to acquire advanced technologies business from Vention Medical, Inc. for approximately $716 million on February 20, 2017.
03/06/2017 Westinghouse Air Brake Technologies Corporation (NYSE:WAB) Westinghouse Air Brake Technologies Corporation, doing business as Wabtec Corporation, provides technology-based equipment and services for the freight rail and passenger transit vehicle industries worldwide. It operates in two segments, Freight and Transit. Faiveley Transport S.A. $784.22 1.53x 14.19x 16.17x Westinghouse Air Brake Technologies Corporation (NYSE:WAB) made an offer to acquire the remaining 49% stake in Faiveley Transport S.A. (ENXTPA:LEY) from Faiveley family and other shareholders for approximately €710 million on July 27, 2015.
02/28/2017 Parker-Hannifin Corporation (NYSE:PH) Parker-Hannifin Corporation manufactures and sells motion and control technologies and systems for various mobile, industrial, and aerospace markets worldwide. CLARCOR Inc. $4,437.42 3.12x 17.19x 22.36x Parker-Hannifin Corporation (NYSE:PH) entered into a definitive agreement to acquire CLARCOR Inc. (NYSE:CLC) for $4 billion on December 1, 2016. Parker-Hannifin Corporation will pay $83 in cash for each outstanding share, restricted stock unit and performance share units of CLARCOR.
01/31/2017 Columbus McKinnon Corporation (NasdaqGS:CMCO) Columbus McKinnon Corporation designs, manufactures, and markets hoists, actuators, cranes, rigging tools, digital power control systems, and other material handling products for commercial and industrial end-user markets worldwide. STAHL CraneSystems GmbH $567.74 3.41x 18.21x Columbus McKinnon Corporation (NasdaqGS:CMCO) entered into stock purchase agreement to acquire STAHL CraneSystems GmbH from Konecranes Plc (HLSE:KCR1V) for approximately €530 million on December 7, 2016.

Source: S&P Capital IQ

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Trading Companies and Distributors

(Building Products, Chemicals, Construction Materials, Electrical Equipment, Machinery, Machinery Rental & Leasing, Paper & Forest Products, Transportation Equipment & Supplies)

Spotlight: MSC Industrial Direct

MSC

Leader in Distribution – MSC Industrial Direct (NYSE: MSM)
MSC is a leading North American distributor of metalworking and maintenance, repair and operations (MRO) products. The company sells more than 1.5 million products and provides inventory management and other supply chain solutions. The Company has over 6,000 employees, 12 customer fulfillment centers, and about 85 branch locations. It serves individual machine shops, manufacturing companies, and government agencies. The company was founded in 1941, is headquartered in Melville, New York, and operates in a highly fragmented industry whereby the top 50 players have only 30% of the market. This huge market is estimated at $160Bn in the U.S.

The company’s return on capital has averaged 14.6% since FY’13. It has enviable margins: 44.2% gross profit margins, 15.4% EBITDA margins, and 8% Net Income margins. Meanwhile its Total Debt to Capital stands at a modest 28.1%. Total annual Revenues have increased by $512.4MM from FY’13 to today’s $2.97Bn (LTM Dec ’17). A look into the company’s strategy provides insights into how they have built such a rock-solid company.

Graco Inc.
Erik David Gershwind
CEO, MSC

Recently MSC’s CEO, Erik David Gershwind, shared 4 key success factors. (Point #4 is about acquisitions.) The first point is that the portfolio of businesses that make up MSC is “highly defensible with deep moats and high entry barriers.” Part of these deep moats and high entry barriers are the deeply technical or high-touch services with which the company serves its manufacturing customers. An example of the high-touch services are those for small components such as fasteners, fuses, fittings that make up approximately 15% of MSC’s business. They are serviced through a vendor managed inventory model. As much as about 90% of MSC’s business is through a salesperson relationship.

Point #2 is that their value proposition is completely focused on improving customers’ productivity, which supports a premium price position. Their brand promise is called “Built to Make You Better,” and the whole notion is anchored in this idea that for their manufacturing customers, the cost of indirect parts represents less than 10% of the cost of keeping a manufacturing operation running, whereas 90% is tied up in labor, materials, and facilities costs. By helping customers with this 90%, MSC helps customers bring their total cost of business down. MSC accomplishes this through hundreds of metalworking salespeople who are out on their customers’ plant floor and engineering cost savings in the manufacturing process (that is, streamlining inventory with vending and vendor-managed inventory solution, processing cost savings, integrating Enterprise Resource Management (ERP) with their web platform, and data and analytics).

Point #3 – The company has grown at 10% top line over the last 20 years, with 11% earnings growth, where “the formula” has been to turn “high single digit organic growth…into operating leverage.” With a stable pricing environment, the company can produce incremental operating margins in the 20%+ range. They use the periods of stronger margins to reinvest back into the business. For example, they recently invested in their infrastructure with the opening of a second headquarters in Davidson, NC. This has allowed them to expand their distribution footprint now being able to service roughly $4Bn in revenues, up from $3Bn.

Point #4 – they teach their leadership to partake in an “employee mindset”. They look to where they think they can make the most money with the highest returns and “steer away from set formulas that allocate capital in a very specific way year in year out.” In 2017 they made a heavy reinvestment into their core business through the $42MM acquisition of DECO Tool, while implementing a share repurchase as their stock looked attractive at $71. Back in 2013 they had made a sizable acquisition, a $550MM purchase of Class C Solutions Group, which gave them greater resources in the vendor-managed inventory program channel. In M&A they take advantage of MSC’s buying scale, and blend in a lot of spot buy and MRO purchases with next day delivery.

One final point to ponder. Online sales now account for 60% of the company’s total revenues. This reaches all of the elements of electronic purchasing, including vending, vendor-managed inventory, Electronic Data Interchange (EDI), and integration into the ERP systems of MSC’s largest customers.

Sources: Capital IQ (data and interview transcripts) and Company Management Presentations

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US Publicly Traded Companies Financial Performance

Top 10 Large Cap Companies: Market Cap > $10 billion (Currency: USD)

Company Mkt Cap (USD in MM) TEV (USD in MM) Tot Rev, 1Y Gr % EBITDA, 1Y Gr % EBIT, 1Y Gr % Fwd P/E Gross Margin % EBITDA Margin % EBIT Margin % Net Inc Margin % Debt / Capital TEV/Tot Rev TEV/EBITDA TEV/EBIT
United Rentals, Inc. $15,120 $24,208 15.3 13.3 15.4 11.97x 42.9 29.3 25.4 20.3 75.2 3.65x 12.43x 14.33x
Fastenal Company $15,876 $16,174 10.8 12.1 10.8 22.08x 49.3 23.0 20.1 13.2 16.5 3.68x 16.04x 18.36x
W.W. Grainger, Inc. $14,994 $17,010 2.8 -9.8 -13.1 19.42x 39.3 12.6 10.1 5.6 56.2 1.63x 13.34x 16.83x

Top 10 Mid Cap Companies: Market Cap between $2 billion and $10 billion (Currency: USD)

Company Mkt Cap (USD in MM) TEV (USD in MM) Tot Rev, 1Y Gr % EBITDA, 1Y Gr % EBIT, 1Y Gr % Fwd P/E Gross Margin % EBITDA Margin % EBIT Margin % Net Inc Margin % Tot Debt/Capital % TEV/Tot Rev TEV/EBITDA TEV/EBIT
Watsco, Inc. $5,540 $5,735 2.9 2.7 2.3 24.86x 24.5 8.7 8.2 4.8 1.4 1.32x 15.26x 16.21x
MSC Industrial Direct Co., Inc. $5,015 $5,487 4.5 2.7 4.9 16.18x 44.2 15.4 13.3 8.0 28.1 1.85x 11.98x 13.91x
Air Lease Corporation $4,784 $14,191 6.9 0.0 3.5 9.76x 66.5 0.0 59.1 49.9 70.1 9.36x 0.00x 15.82x
Beacon Roofing Supply, Inc. $3,730 $5,705 8.3 1.6 -1.5 15.14x 24.3 8.5 6.0 3.3 52.4 1.27x 14.88x 21.24x
WESCO International, Inc. $3,101 $4,366 4.7 -3.4 -3.4 14.09x 19.3 4.9 4.2 2.1 39.6 0.57x 11.64x 13.60x
SiteOne Landscape Supply, Inc. $2,958 $3,416 13.0 28.2 32.2 37.24x 32.0 7.6 5.3 2.9 69.1 1.83x 24.25x 34.93x
Applied Industrial Technologies, Inc. $2,856 $3,084 8.3 12.8 17.0 20.43x 28.3 8.6 7.1 5.4 28.7 1.14x 13.31x 16.04x
GATX Corporation $2,750 $6,847 -2.8 -5.4 -13.2 15.43x 61.9 47.2 23.7 36.7 71.0 5.00x 9.91x 18.61x
Installed Building Products, Inc. $2,120 $2,386 30.0 33.7 24.1 25.50x 29.1 12.2 7.5 3.9 64.4 2.24x 18.36x 29.81x
Rush Enterprises, Inc. $1,675 $3,024 11.8 24.5 69.3 0.00x 17.6 6.4 3.2 3.7 58.6 0.64x 10.03x 20.32x

Top 10 Small Cap Companies: Market Cap between $250 million and $2 billion (Currency: USD)

Company Mkt Cap (USD in MM) TEV (USD in MM) Tot Rev, 1Y Gr % EBITDA, 1Y Gr % EBIT, 1Y Gr % Fwd P/E Gross Margin % EBITDA Margin % EBIT Margin % Net Inc Margin % Tot Debt/Capital % TEV/Tot Rev TEV/EBITDA TEV/EBIT
Aircastle Limited $1,604 $5,703 3.4 NA 4.3 8.78x 61.2 NA 52.3 18.6 69.3 7.18x NA 13.49x
MRC Global Inc. $1,572 $2,405 19.9 209.3 NM 23.26x 15.3 3.6 1.8 1.4 32.1 0.66x 18.08x 36.44x
Kaman Corporation $1,753 $2,131 -3.4 5.9 6.3 22.02x 30.1 9.2 6.9 2.9 40.1 1.21x 13.16x 17.55x
BMC Stock Holdings, Inc. $1,354 $1,763 14.6 10.4 8.2 14.32x 23.8 5.7 3.6 1.5 36.7 0.54x 9.40x 14.94x
H&E Equipment Services, Inc. $1,390 $2,191 5.3 12.0 18.3 21.30x 34.9 14.7 12.3 10.6 81.7 2.13x 14.52x 17.24x
DXP Enterprises, Inc. $540 $763 -5.4 25.6 89.0 36.63x 27.1 6.3 3.4 1.8 48.1 0.79x 12.61x 23.44x
CAI International, Inc. $448 $2,116 18.4 101.3 103.7 5.71x 42.6 32.5 31.9 20.7 75.1 6.07x 18.67x 19.06x
Titan Machinery Inc. $441 $819 -4.1 41.1 NM NM 18.0 2.6 0.4 -1.4 56.9 0.69x 26.58x 167.08x
Aceto Corporation $232 $490 35.5 20.6 -15.5 7.32x 21.3 9.9 5.4 -0.8 45.1 0.66x 6.45x 11.50x

Top 10 Micro Cap Companies: Market Cap less than $250 million (Currency: USD)


Company Mkt Cap (USD in MM) TEV (USD in MM) Tot Rev, 1Y Gr % EBITDA, 1Y Gr % EBIT, 1Y Gr % Fwd P/E Gross Margin % EBITDA Margin % EBIT Margin % Net Inc Margin % Tot Debt/Capital % TEV/Tot Rev TEV/EBITDA TEV/EBIT
Lawson Products, Inc. $208 $224 10.6 88.6 391.2 29.56x 59.8 3.6 1.5 9.7 18.3 0.73x 20.19x 49.64x
Huttig Building Products, Inc. $140 $242 4.8 -53.1 -66.5 21.64x 20.9 1.7 1.0 0.3 57.8 0.33x 19.86x 32.31x
General Finance Corporation $196 $672 13.5 23.2 75.2 NM 45.2 22.3 9.4 0.3 74.1 2.16x 9.68x 23.09x
Willis Lease Finance Corporation $173 $1,147 26.2 14.6 28.7 0.00x 84.5 60.5 35.3 8.5 77.9 4.39x 6.95x 11.55x
Bluelinx Holdings Inc. $138 $482 -4.4 60.7 105.1 0.00x 12.8 2.2 1.6 1.1 105.8 0.27x 12.42x 16.22x
Transcat, Inc. $110 $136 9.3 3.9 5.1 19.58x 24.0 9.4 5.4 3.2 35.1 0.90x 9.55x 16.60x

* Equity related values are as of previous business day’s stock market close.

TEV (Total Enterprise Value) is an economic measure reflecting the market value of a business. It is a sum of claims by all claimants: creditors (secured and unsecured) and shareholders (preferred and common).

Source: S&P Capital IQ
Historical Equity Pricing Data supplied by Interactive Data Pricing and Reference Data LLC

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Strategic M&A Activity in 2017

Aggregate summaries of the most active acquires and disclosed transactions within the industry

Most Active Strategic Acquirers

Company Name Number Of Transactions
Sunbelt Rentals, Inc. 9
Winsupply Inc. 5
Ritter Technology, LLC 3
Crescent Electric Supply Co., Inc. 2
Linde Gas North America LLC 2
Ta Chen International, Inc. 2
The Hiller Companies, Inc. 2
United Rentals (North America), Inc. 2
A.J. Oster, LLC 1
AHB Tooling & Machinery, Inc. 1

Largest Dollar Volume of Acquisitions

Company Name Total Transaction Size ($MM)
United Rentals (North America), Inc. $1,597.46
Silgan International Holdings B.V. $1,050.00
Silgan White Cap Holdings Spain, S.L. $1,050.00
Silgan Holdings LLC $1,050.00
Sunbelt Rentals, Inc. $643.29
Nidec Americas Holding Corporation $202.25
Nidec Europe B.V. $202.25
Traxys North America LLC $179.00
Traxys Europe SA $179.00
Carrier Enterprise, LLC $63.60

Summary of Average M&A Market in Industry

Valuation Summary Valuation
Total Deal Value($mm): $4,063.70
Average TEV/Revenue: 2.851x
Average TEV/EBITDA: 10.194x

Disclosed Deal Values

Number of Deals by Transaction Ranges Deals
Greater than $1 billion 1
$500 – $999.9mm 2
$100 – $499.9mm 4
Less than $100mm 18
Undisclosed 93

Selected Transactions

M&A Closed Date Buyers/Investors Business Description [Buyers/Investors] Target/Issuer Total Transaction Value ($USD IN MM) Implied Enterprise Value/Revenues (x) Implied Enterprise Value/EBITDA (x) Implied Enterprise Value/EBIT (x) Transaction Comments
11/01/2017 A.J. Oster, LLC A.J. Oster, LLC engages in the custom processing and distribution of metal foils, strips, and sheets. Unimet Metal Supply Inc. $42.00 “A.J. Oster, LLC acquired Unimet Metal Supply Inc. for $42 million on November 1, 2017. The acquisition will be accretive to earnings of Global Brass and Copper Holdings, Inc. parent of A.J. Oster.
10/02/2017 United Rentals (North America), Inc. United Rentals (North America), Inc. operates as an equipment rental company. It operates in two segments, General Rentals; and Trench, Power, and Pump. Neff Corporation $632.46 United Rentals (North America), Inc. (‘URNA’) entered into a definitive agreement to acquire Neff Corporation (NYSE:NEFF) from Wayzata Investment Partners LLC (acting through funds Wayzata Opportunities Fund II LP and Wayzata Opportunities Fund Offshore II LP) and other shareholders for approximately $632 million on August 16, 2017.
08/31/2017 Traxys North America LLC; Traxys Europe SA Traxys Europe SA trades ores, ferroalloys, and non-ferrous metals. CMC Cometals Processing, Inc. $179.00 Traxys North America LLC and Traxys Europe SA signed a definitive agreement to acquire CMC Cometals Processing, Inc. from CMC Cometals International S.a r.l. on June 12, 2017.
08/01/2017 Sunbelt Rentals, Inc. Sunbelt Rentals, Inc. provides equipment rental services. CRS Contractors Rental Supply, Inc. $234.21 Sunbelt Rentals, Inc. signed an agreement to acquire CRS Contractors Rental Supply, Inc. from Clairvest Equity Partners IV Limited Partnership and Clairvest Group Inc. (TSX:CVG) for approximately CAD 300 million on July 19, 2017.
08/01/2017 Nidec Americas Holding Corporation; Nidec Europe B.V. Nidec Europe B.V. sells small precision motors, communications, home appliances, and industrial motors. The company was founded in 1990 and is based in Almere, the Netherlands. Nidec Europe B.V. operates as a subsidiary of Nidec Corporation. Nidec Global Appliance Germany GmbH $202.25 0.519x Nidec Americas Holding Corporation and Nidec Europe B.V. entered into a stock purchase agreement to acquire Secop GmbH from AURELIUS Equity Opportunities SE & Co. KGaA (XTRA:AR4) for approximately €190 million on April 25, 2017.
06/21/2017 Carrier Enterprise, LLC Carrier Enterprise, LLC distributes heating, ventilation, and air conditioning equipment. Russell Sigler Inc. $63.60 0.28x Carrier Enterprise, LLC acquired 35% ownership in Russell Sigler, Inc. for $63.6 million on June 21, 2017.
05/22/2017 Sunbelt Rentals, Inc. Sunbelt Rentals, Inc. provides equipment rental services. RGR Equipment, LLC $58.00 “Sunbelt Rentals, Inc. acquired the business and assets of RGR Equipment, LLC for $58 million on May 22, 2017.
05/01/2017 Kush Bottles, Inc. (OTCPK:KSHB) Kush Bottles, Inc. markets and sells packaging products and solutions in the United States. CMP Wellness, LLC $33.30 10.74x Kush Bottles, Inc. (OTCPK:KSHB) acquired CMP Wellness, LLC from Jason Manasse and Theodore Nicols for $33.3 million on May 1, 2017.
04/06/2017 Silgan International Holdings B.V.; Silgan White Cap Holdings Spain, S.L.; Silgan Holdings LLC Silgan Holdings LLC, through its subsidiaries, manufactures and sells rigid packaging such as metal containers, closures, and plastic containers for shelf-stable food and other consumer goods products. WestRock Company, Specialty Closures and Dispensing Systems Business $1,050.00 1.86x 10.19x 21.88x Silgan Holdings LLC, Silgan White Cap Holdings Spain, S.L. and Silgan International Holdings B.V. signed a definitive agreement to acquire Specialty Closures and Dispensing Systems Business from WestRock MWV, LLC for approximately $1.1 billion on January 23, 2017.
04/03/2017 Sunbelt Rentals, Inc. Sunbelt Rentals, Inc. provides equipment rental services. Pride Equipment Corporation $279.00 “Sunbelt Rentals, Inc. acquired Pride Equipment Corporation from the seller family for approximately $280 million on April 3, 2017.
04/03/2017 United Rentals (North America), Inc. United Rentals (North America), Inc. operates as an equipment rental company. It operates in two segments, General Rentals; and Trench, Power, and Pump. NES Rentals Holdings, Inc. $965.00 United Rentals (North America), Inc. (‘URNA’) entered into a definitive agreement to acquire NES Rentals Holdings, Inc. (‘NES’) from Diamond Castle Holdings, LLC and other shareholders for approximately $965 million on January 25, 2017.
02/14/2017 Watsco, Inc. (NYSE:WSO) Watsco, Inc., together with its subsidiaries, distributes air conditioning, heating, and refrigeration equipment; and related parts and supplies in the United States, Canada, Mexico, and Puerto Rico. Carrier Enterprise Northeast, LLC $43.00 0.86x Watsco, Inc. (NYSE:WSO) acquired additional 10% stake in Carrier Enterprise Northeast, LLC from Carrier Corporation for $43 million on February 14, 2017.

Source: S&P Capital IQ

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Private Equity M&A Activity in 2017

M&A Closed Date Buyers/Investors Business Description [Buyers/Investors] Target/Issuer Total Transaction Value ($USD IN MM) Implied Enterprise Value/Revenues (x) Implied Enterprise Value/EBITDA (x) Implied Enterprise Value/EBIT (x) Transaction Comments
11/08/2017 The Hillman Group, Inc. The Hillman Group, Inc. markets, packages, and distributes hardware-related products and merchandising services to retail markets in North America. Hargis Industries, Lp $48.00 The Hillman Group, Inc. entered into asset purchase agreement to acquire Hargis Industries, Lp from Joedy S. Hargis Irrevocable Trust and Jeffrey S. Hargis Irrevocable Trust for $48 million on November 8, 2017.
10/31/2017 EnviroStar, Inc. (AMEX:EVI) EnviroStar, Inc., through its subsidiaries, distributes commercial, industrial, and vended laundry and dry cleaning equipment, and steam and hot water boilers in the United States, the Caribbean, and Latin America. Tri-State Technical Services, Inc. $19.42 0.719x EnviroStar Inc. (NYSE:EVI) entered into an asset purchase agreement to acquire substantially all of the assets of Tri-State Technical Services, Inc. from Matt Stephenson for $19.4 million on September 8, 2017.
10/03/2017 Lawson Products, Inc. (NasdaqGS:LAWS) Lawson Products, Inc. distributes products and services to the industrial, commercial, institutional, and government maintenance, repair, and operations marketplace in the United States, Puerto Rico, Canada, Mexico, and the Caribbean. The Bolt Supply House, Ltd. $32.02 0.93x Lawson Products, Inc. (NasdaqGS:LAWS) acquired The Bolt Supply House, Ltd. from 1701017 Alberta Ltd., Prairie Merchant Corporation, John McCann Family Trust, Gedeon Trust, John J. McCann and W. Brett Wilson for approximately CAD 40 million on October 3, 2017.
09/08/2017 General Finance Corporation (NasdaqGM:GFN) General Finance Corporation, a specialty rental services company, provides portable storage, modular space, and liquid containment solutions in North America and the Asia-Pacific regions. Royal Wolf Holdings Limited $70.72 1.98x 8.03x 19.94x General Finance Corporation (NasdaqGM:GFN) signed a bid implementation agreement to acquire remaining 49.9% stake in Royal Wolf Holdings Limited (ASX:RWH) for AUD 92.2 million on July 12, 2017.
08/17/2017 Amerinac Holding Corp. Amerinac Holding Corp., through its subsidiaries, distributes nut and bolt products, and a proprietary locking washer product that are used primarily for aerospace and military, and industrial/commercial applications in the United States. Prime Metals & Alloys Inc. $9.60 Amerinac Holding Corp. entered into an asset purchase agreement to acquire all of the assets of Prime Metals & Alloys Inc. for $9.6 million on July 12, 2017.
07/31/2017 MSC Industrial Direct Co., Inc. (NYSE:MSM) MSC Industrial Direct Co., Inc., together with its subsidiaries, distributes various ranges of metalworking and maintenance, repair, and operations (MRO) products primarily in the United States, Canada, and the United Kingdom. DECO Tool Supply Company, Inc. $42.00 0.42x MSC Industrial Direct Co., Inc. (NYSE:MSM) acquired DECO Tool Supply Company, Inc. for $42 million on July 31, 2017. DECO’s annual revenue was approximately $100 million in 2016.
06/19/2017 EnviroStar, Inc. (AMEX:EVI) EnviroStar, Inc., through its subsidiaries, distributes commercial, industrial, and vended laundry and dry cleaning equipment, and steam and hot water boilers in the United States, the Caribbean, and Latin America. Martin-Ray Laundry Systems Inc. $3.98 0.346x EnviroStar, Inc. (AMEX:EVI) entered into an asset purchase agreement to acquire substantially all of the assets of Martin-Ray Laundry Systems Inc. from William Mann, Jim Hohnstein and Timm Mullen for $3.9 million on June 2, 2017.
06/16/2017 Fortress Transportation and Infrastructure Investors LLC (NYSE:FTAI) Fortress Transportation and Infrastructure Investors LLC owns and acquires infrastructure and related equipment for the transportation of goods and people in Africa, Asia, Europe, South America, and North America. Hannibal Development, LLC $30.00 “Fortress Transportation and Infrastructure Investors LLC (NYSE:FTAI) acquired substantially all the assets of Hannibal Development Partners LLC for $30 million June 16, 2017.
04/03/2017 Nexeo Solutions, Inc. (NasdaqCM:NXEO) Nexeo Solutions, Inc. operates as a chemical and plastic products distributor in North America, Europe, the Middle East, Africa, and Asia. Ultra Chem, S. De R.L. De C.V., Speciality Chemical Distribution Business $58.00 0.967x Nexeo Solutions, Inc. (NasdaqCM:NXEO) agreed to acquire specialty chemicals distribution business of Ultra Chem, S. de R.L. de C.V. for $58 million on March 9, 2017.
03/31/2017 Fastenal Company (NasdaqGS:FAST) Fastenal Company, together with its subsidiaries, engages in the wholesale distribution of industrial and construction supplies in the United States, Canada, and internationally. Manufacturers Supply Company Inc. $60.40 1.21x Fastenal Company (NasdaqGS:FAST) signed an agreement to acquire assets of Manufacturers Supply Company on March 3, 2017.
01/01/2017 Foundation Building Materials, Inc. (NYSE:FBM) Foundation Building Materials, Inc. distributes building products in the United States and Canada. It operates through two segments, Specialty Building Products and Mechanical Insulation. Dominion Interior Supply Corporation $13.10 Foundation Building Materials, Inc. (NYSE:FBM) acquired Dominion Interior Supply Corporation for $13.1 million on January 1, 2017.

Source: S&P Capital IQ

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Headquartered in the rapidly growing city of Greenville, South Carolina, Watermark Advisors, est. 2002, is an investment banking firm that specializes in mergers and acquisitions (M&A) and private placement financing transactions for clients. It offers a uniquely comprehensive approach to M&A for both sellers and acquirers. For sellers, this approach is designed to ensure that companies are able to exit when the shareholders so desire, improve the exit returns on investment, and to increase the outcomes of the legacy assets (human, tangible, and intangible) once these are under new ownership. For acquirers, our comprehensive approach is designed to counter the dismal ROI gain that transaction focusing M&A deals typically produce. Watermark has facilitated sell-side M&A, acquisition financings, valuations, fairness opinions, and strategy consulting to over 70 clients.

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