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Are distribution valuations peaking?

August 16, 2006
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The recent acquisition of Hughes Supply by Home Depot set a high bar for valuations of distribution companies. Now may be the best window ever for selling a distribution company. Consider:
  • General stock market averages are trading at a high P/E multiple;
  • A big excess of funds has been raised by private equity firms for doing leveraged buyouts; and,
  • Many distributors are making good profits turbo-charged by inflation appreciation in their inventory that are not taxed if on LIFO, but counted in EBITDA buyout multiple valuations.

What is the specific news on distributor buyouts? What are the trends in both public and private valuations for distributors? What are the specific numbers? All of this information has been compiled and is being shared by a boutique investment advisory company out of Chicago, Starshak/Welnhofer (S/H), in what may become a monthly report. (Their Web site is at http://www.swandco.com)

I bumped into these guys on a deal that we were both involved in and agreed to give them a plug because:
  • They were very competent in advising the common client on the sell side.
  • The report that they put together was totally focused on distribution companies, quite comprehensive and even had some novel valuation methods.
  • The report is free to those who contact the firm at 888-461-1030.

If you do contact them, tell them that I sent you. If you would like to talk with one of the principals, ask for Bill Welnhofer who is the chap that I have been working with.

Otherwise, the big question is how long will these valuation multiples last? But, that question in turn depends on:
  • How long do you think the bubbles will last for global consumption of commodities going into construction and infrastructure?
  • When will we have a U.S. consumer retrenchment due to: energy costs and rising costs of ARMs and home-equity loans while incomes for the bottom 80 percent+ of Americans are not going up?
  • If the U.S. goes into a recession, what will happen to the economies of supply-chain Asia?
  • Then, what will happen to the demand (and speculative price premiums) for commodities?
  • LIFO accounting works great when the economy grows and inventory prices go up, but it cuts the other way when the economy cools and inventory deflates. How do all of these issues affect distributor evaluations and the expansion or compression of valuation multiples?

S/H’s report provides information that should be part of the conversations that we should be having about these economic issue questions.

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