spot on distribution · spot on for the distribution sector: “the number of deals in the global...

Don Wiggins and Alex Kellison, Oaklins' distribution sector specialists, are pleased to share some high-level industry intelligence in this second edition of Spot On for the distribution sector:

“The number of deals in the global distribution sector decreased from 2016 to 2017, but total invested capital increased, implying an increase in the average deal size from 2016 to 2017. Two large deals in the pharmaceutical distribution industry account for nearly US$20 billion of invested capital in 2017.

Valuation trends have been positive in the distribution space overall since 2016, with food and beverage

and consumer goods valuations showing the most improvement in the past 24 months. Healthcare distribution company valuations have slipped in recent months, while industrial and capital goods distributors’ valuations have remained consistent in the last 36 months.”

Oaklins has advised clients on more than 70 transactions in the distribution sector in the past five years across the Americas, EMEA and Asia. Our sector specialists advise clients in a wide variety of situations, including mergers and acquisitions, valuations, strategic consulting and raising capital.

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SPOTLIGHT

PUBLIC COMPANY VALUATIONS

MARKET OVERVIEW

Page 2

1

M&A ACTIVITY

DISTRIBUTIONSPOT ON

Page 4

We look into the strategy and performance of the world’s largest supplier of products to dental, animal health, and medical practitioners and their recent acquisitions.

MotorCycle Holdings (ASX: MTO) acquires Cassons Pty Ltd.

$0

$10

$20

$30

$40

$50

$60

$70

$80

2013 2014 2015 2016 2017

952994

54.20

42.6350.38

59.0459.0450.38

42.63

54.20

Deal count Invested capital (US$bn)

73.03

0

200

400

600

800

1,000

1,200

1,400

1,600

1,114 1,3471,331

2Spot On · Distribution · 2nd edition · March 2018

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$10

$20

$30

$40

$50

$60

$70

$80

2013 2014 2015 2016 2017

952994

54.20

42.6350.38

59.0459.0450.38

42.63

54.20

Deal count Invested capital (US$bn)

73.03

0

200

400

600

800

1,000

1,200

1,400

1,600

1,114 1,3471,331

Market overview

Total invested capital and deal count 2013–2017

Source: PitchBook Data, Inc.

To analyze the distribution sector with more granularity, we have identified four different subgroups below. In our market analysis we do not include those firms whose primary activity is manufacturing, but rather those that purcha-se goods from manufacturers and resell them on a wholesale or retail basis. We do include those distributors that add some value to the product before it is resold, such as firms that provide assembled or bundled products.

Healthcare

This category includes firms that are wholesalers or value-added distributors of pharmaceuticals, medical devices and equipment, healthcare supplies, insuran-ce products and other healthcare products.

Biotech and other research firms are not included in this category. Healthcare technology companies are also not included here.

Industrial & Capital Goods (ICG)

ICG distribution companies can vary across a wide variety of products that are typically durable goods, i.e. those lasting for more than one year.

Common ICG distributors’ products include electrical equipment, HVAC, industrial chemicals and gases, building materials, heavy equipment and machinery, and hardware. This is not an exhaustive list but me-rely illustrative of the types of firms that would be included in this subgroup.

Consumer Goods

Like ICG distributors, consumer products distributors wholesale or retail a wide variety of products. However, we define consumer goods as those products that have a shelf life of less than one year.

Examples of consumer goods distributors include clo-thing and footwear, sundries and groceries (ex-food), cosmetics, office supplies and household care products.

Food & Beverage

Food and beverage distribution companies covered in this category include companies such as Sysco and U.S. Foods. These firms are wholesalers and supply food and beverage products to restaurants, grocery stores and other retailers.

Firms in this category do not grow, produce or other-wise manufacture any food or beverage products themselves.


E-COMMERCE/E-BUSINESSFirms such as Amazon and Walmart (via its acquisition of Jet) have driven investment and innovation in online business and fulfillment that have forced other distributors to follow suit. The importance of online presence tends to vary by industry. However, online presence is critical for consumer goods and less vital for industrial and capital goods providers, generally speaking.

SEGMENTATION & STRATIFICATION Successful distributors are focusing on concentrating marketing efforts based on segments of their customer base and stratifying those customers according to factors such as demographics, profitability and order size/frequency. This allows distributors to tailor their value propositions and offerings according to various types of customer groups rather than as a whole.

BIG DATA & ANALYTICSThe use of technology and data is becoming more common for distribution companies as they focus more on operating efficiency and keeping costs under control. Predictive analytics tools are being deployed in distribution to better understand customer buying habits and trends, which helps managers to save on inventory costs.

PRIVATE LABELINGA number of retailers, particularly in the food and beverage sub-sector, have invested in private labeling as a way to reduce acquisition costs and increase their margins. This has forced distributors to hone their own brand identities and offerings as well as to think more deeply about how they add value to the supply chain.

Market overview

A number of trends and economic factors have influenced companies involved in distribution over the past decade, far too many to compile in one list. However, we list below some major factors that have driven changes to distribu-tion firms’ business processes and overall operations in more recent years.

E-commerce sales in the US grew by 16.9% in the fourth quarter of 2017, according to the US National Retail Federa-tion (NRF). Overall retail sales grew by 5.7% during the same period. E-commerce sales accounted for 9.1% of total sales in the fourth quarter of 2017, up from 8.2% of total sales in the fourth quarter of 2016.

5.0%

6.0%

7.0%

8.0%

9.0%

10.0%

0.0%

2.5%

5.0%

7.5%

10.0%

12.5%

15.0%

17.5%

20.0%

Q4 2016 Q1 2017 Q2 2017 Q3 2017 Q4 2017 *

16.915.416.015.414.4 5.74.345.23.5

Retail sales growth (YoY) E-commerce sales growth (YoY) E-commerce % of total sales

Retail and e-commerce sales growth in the past five quarters

* Estimate by the U.S. Census BureauSource: U.S. Census Bureau


Selected public company valuations

A selection of public listed companies from each of the four subgroups within the distribution sector**

Company Country Enterprise value(US$m)

EV/ Revenue

EV/ EBITDA

AmerisourceBergen USA 21,406.4 0.1x 14.3x

Neuca Poland 395.7 0.2x 10.7x

Henry Schein USA 12,453.4 1.0x 12.2x

McKesson USA 38,488.6 0.2x 5.3x

Nanjing Pharmaceutical Company China 1,603.0 0.8x 52.2x

Owens & Minor USA 1,975.2 0.2x 9.8x

Patterson Companies USA 4,422.5 0.8x 12.3x

Selcuk Ecza Deposu Turkey 560.4 0.2x 5.1x

Toho Holdings Co. Japan 1,182.8 0.1x 5.0x

Vifor Pharma Group Switzerland 10,115.9 2.4x 20.2x

Average 0.6x 14.7x

Average w/o outliers 0.4x 10.6x

Median 0.2x 11.5x


EV/ Revenue

EV/ EBITDA

Air Liquide France 70,084.4 3.5x 13.6x

Beacon Roofing Supply USA 4,959.8 1.1x 17.7x

Cosan Industria Brazil 7,396.8 3.3x 10.2x

Ferguson Switzerland 18,566.0 1.0x 9.3x

HD Supply USA 9,069.7 1.1x 10.3x

Itochu Japan 52,722.1 1.1x 8.8x

Nordwest Handel Germany 61.8 0.1x 5.1x

Rexel France 8,270.8 0.6x 14.2x

Ryerson USA 1,357.4 0.4x 9.5x

W.W. Grainger USA 15,634.5 1.5x 12.9x

Average 1.4x 11.2x


Median 1.1x 10.2x

Healthcare

Industrial & Capital Goods (ICG)

** Valuation data is as of 31 December 2017.Source: PitchBook Data, Inc.


Selected public company valuations

A selection of public listed companies from each of the four subgroups within the distribution sector**


EV/ Revenue

EV/ EBITDA

Alliance One International USA 1,400.0 0.8x 9.5x

CMST Development Company China 4,301.8 2.4x 19.0x

Bunzl UK 10,881.1 1.1x 15.5x

Core-Mark International USA 1,948.6 0.1x 15.7x

Costco Wholesale USA 81,597.4 0.6x 14.5x

Dick's Sporting Goods USA 3,496.3 0.4x 4.8x

Metcash Australia 2,448.6 0.2x 9.9x

Orient International Enterprise China 696.8 0.3x 14.9x

Paltac Japan 3,057.3 0.4x 12.1x

Shoprite Holdings South Africa 10,047.7 1.0x 13.4x

Average 0.6x 14.7x


Median 0.2x 11.5x


EV/ Revenue

EV/ EBITDA

Bonduelle France 2,425.0 1.0x 12.3x

Mitsubishi Shokuhin Company Japan 1,659.8 0.1x 10.7x

United Natural Foods USA 2,909.1 0.3x 9.0x

MARR Italy 1,909.0 1.1x 15.3x

Pioneer Food Group South Africa 2,139.7 1.5x 18.4x

Premium Brands Canada 2,814.9 1.7x 21.5x

Sligro Food Group Netherlands 2,174.2 0.7x 12.1x

Sysco USA 39,782.2 0.7x 13.3x

Total Produce Ireland 1,119.9 0.3x 12.3x

Orkla Norway 11,838.2 2.5x 14.6x

Average 1.0x 14.0x


Median 0.8x 12.8x

Consumer Goods

Food & Beverage

** Valuation data is as of 31 December 2017.Source: PitchBook Data, Inc.


Selected public company valuation trends

0.0x

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Jan-

15

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Industrial & Capital GoodsHealthcare Food & BeverageConsumer Goods

Jan-

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15.0x14.0x13.0x12.0x11.0x10.0x

9.0x8.0x7.0x6.0x

Industrial & Capital GoodsHealthcare Food & BeverageConsumer Goods

Jan-

15

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-15

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70%60%50%40%30%20%10%

0%-10%-20%

Industrial & Capital GoodsHealthcare Food & Beverage S&P 500Consumer Goods

The industrial and capital goods and healthcare EV/revenue multiples have been relatively consistent. Food and beverage has been increasing steadily, while the revenue multiples for the consumer goods sub-sector experienced declines in recent months.

Healthcare sub-sector EV/EBITDA multiples have trended downward over the past three years, while consumer goods and food and beverage sub-sector

valuations have increased during the same period. Industrial and capital goods EBITDA multiples have largely remained unchanged.

The chart below compares price returns of the four sub-sectors to the S&P 500. The food and beverage sub-sector has been outperforming all other sub-sectors relative to the S&P 500 over the last three years. The healthcare sub-sector experienced a downturn during

2016 and has underperformed other distribution sub-sectors as well as the S&P 500 since then, while the consumer goods and industrial and capital goods sub-sectors have traded in line with the S&P 500 over the past three years.



Henry Schein (NASDAQ: HSIC) is the world’s largest provider of healthcare products and services to dental, animal health and medical practitioners. The company serves customers worldwide, including dental laborato-ries, government and institutional healthcare clinics and other alternate care locations.

Henry Schein also offers value-added services such as technology solutions, including practice management software, e-commerce solutions and financial services.

As of 30 September 2017, net sales were US$12.3 billion, with a 6.0% increase from 2016, and have held a steady EBITDA margin of 8.3%. Net sales were driven by the company’s dental sales of US$5.9 billion.

Headquartered in Melville, New York, Henry Schein has operations in 34 countries. There are over 22,000 Henry Schein members, and they have more than one million customers. Henry Schein has recently been recognized as one of the “2018 World’s Most Ethical Companies” by the Ethisphere Institute for the seventh year.

● Only global animal healthdistributor

● 3 out of 6 acquisitions from2016–2017 were related to theenhancement of animal healthpractices

● 27.9% of net sales for Q3 2017● 75% of veterinarians in the US are

active Henry Schein customers,70% in Europe and 70% inAustralia/New Zealand

● A leading distributor to primarycare physicians and specialists,group practices, physician-ownedlabs and ambulatory surgerycenters

● 55% of US physician practices areactive Henry Schein customers

● Operations in certain Europeanmarkets

● Only global dental distributor togeneral practitioners, specialistsand laboratories

● 90% of US dental practices areactive customers, 80% of dentallabs in North America, 65% ofEuropean dental practices, 80% ofAustralia/New Zealand and 60% ofBrazil

● A leader in practice managementsoftware solutions for dental andanimal health practices

● Full-service provider of financialservices

● Ability to serve large practices● Serving 40% of dental practices

and 50% of animal health practices● Direct access to more than 90% of

dental schools in North America

“Henry Schein’s more than 80 years of experience distributing healthcare products provides a reliable, trusted source of supply for their customers’ needs.”

Henry Schein at a glance

Animal health

Medical

Dental

Technology value-added services

Spotlight


The company’s primary objective is to enable its customers to focus on delivering quality care to their patients. Growth opportunities for Henry Schein include:

● Focus on preventive care. Henry Schein will heighten the importance of wellness and prevention by providingclinicians with the resources they need to manage and grow their businesses profitably and by improving accessto care.

● Geographic expansion. The global distribution network is at 90% utilization with capacity for growth. Thecompany believes there is room for expansion within all four of its business segments and also wants greaterpenetration of specialty markets.

● Technological improvements. The company would like to broaden synergies between the technology andvalue-added services segment and the healthcare distribution business.

● High single-digit to low double-digit EPS growth long term. Henry Schein plans to achieve attractive long-term EPS growth by expanding its operating margins, gaining market share on its organic business, repurchasingshares and continuing to acquire companies in selected target markets.

Spotlight

Source: PitchBook Data, Inc., Henry Schein Annual Report 2016, Henry Schein Q3 2017 Investor Presentation


Henry Schein is a customer-driven health solutions network powered by people and technology. They bring commitment to their products and platforms that enhance the customer experience and provide real value to their practices. The company has the vision and the resources to bring together solutions, knowledge and expertise, with Henry Schein at the core.

Henry Schein has a sales and marketing approach that is uniquely integrated, with approximately 3,725 field sales consultants, approximately 1,850 telesales representatives and 199 equipment sales and service centers worldwide — all supported by approximately 34 million highly targeted direct marketing pieces. This multifarious design leads to higher customer satisfaction and employee engagement, greater cooperation with supplier partners and long-term shareholder value.

Henry Schein’s success in assembling this distribution network has led to revenue growth of US$3.3 billion over the past five years. Revenue increased from US$11.6 billion in 2016 to US$12.3 billion, with an EBITDA margin of 8.3%, as of 30 September 2017.

The company has been highly active in its recent M&A activity. It has completed or announced 11 acquisitions since the beginning of 2016. Some of Henry Schein’s recent M&A activity is shown in the table below.

Strategy and performance

Spotlight

Source: Henry Schein Q3 2017 Investor Presentation

Closed/ announced Target Country Business description

Enterprise value (US$m)

18-Dec-2017 eVetPractice Distributor and operator of cloud-based software for veterinary clinics Undisclosed

10-Oct-2017Merritt

Veterinary Supplies

Distributor of veterinary and animal healthcare services enabling animals to stay healthy and improve their performance, breeding recovery, repair and general wellness

115.0

02-May-2017Southern

Anesthesia and Surgical

Provider of dental pharmaceutical products and services intended to deliver competitive pricing, fast shipping and the best customer services

72.0

23-Jan-2017 Tecnew Distributor of animal health products to veterinary clinics 24.0

08-Dec-2016 MarrodentSupplier of dental care products. The company is engaged in the distribution of dental and prosthetic products such as liners, filling materials, whitewash and dental tools.

32.0



Recent M&A activity

A selection of private transactions in the distribution sector

Date Target Buyer Sub-sector Target description Country ValuationEV

(US$m)EV/

SalesEV/

EBITDA

Oct 2017Industrial & Capital

Goods

Distributor of motor vehicle accessories and parts, including helmets, boots, gloves and bike parts

123.2 2.1x 9.8x

Jun 2017 Food & Beverage

Importer and distributor of seafood. The company supplies a wide variety of products, species and forms of fresh seafood to specialty markets and restaurants in the US.

107.0 0.5x 6.7x

Mar 2017 KIPF, SP.ZO.O Healthcare

Polish-based pharmaceutical distributor in both Poland and Lithuania. The company supplies a range of drugs and pharmaceutical products to pharmacies and inpatient healthcare institutions.

152.9 0.1x 4.9x

Sep 2016Industrial & Capital

Goods

Distributor of fuel and lubricants. The company provides gasoline, diesel, kerosene, heavy-duty oil, additives, hydraulic oil and other petrochemical fluids.

15.5 0.4x 6.2x

Feb 2016 DIPLOMAPLCIndustrial & Capital

Goods

Supplier of cable wiring systems and markers. The company provides products which are used to identify, connect, secure and protect electrical cables.

37.0 1.6x 6.6x

Dec 2015ZHEJIANG JIANGSHAN

CHEMICAL CO., LTD.

Industrial & Capital

Goods

The company distributes specialty chemicals such as propylene glycol, dimethyl glycol, polycarbonate and other related chemicals in China

124.3 0.6x 3.5x

Aug 2015Industrial & Capital

Goods

Distributor of hardware and building materials to professional resellers and the construction maintenance sector

61.1 0.5x 5.3x

Mar 2015 Food & Beverage

Distributor of beverage products to the food service industry. The company is engaged in the distribution and marketing of roasted coffee, water and coffee machines.

21.6 0.7x 6.6x

Mar 2015Industrial & Capital

Goods

Italy-based distributor of industrial machinery, tools and supplies. The company services a wide variety of industries and customers throughout Europe.

100.8 0.6x 6.8x



The private shareholders of Florida Roads Materials LLC have sold the company to Smyrna Ready Mix Concrete (SRM) for an undisclosed amount.

Florida Roads Materials is a supplier of ready-mix concrete and building materials such as lumber, rebar and wire mesh to residential and commercial contractors in the southeastern United States.

Founded in 1999, SRM is a family-owned company that produces ready-mix concrete. The firm has facilities in Florida, Georgia, Indiana, Kentucky, Ohio and Tennessee.

Oaklins' team in Jacksonville, USA, advised the seller in this transaction.

Case study

A selection of recent Oaklins M&A transactions

Recent M&A activity



MEET OAKLINS, THE WORLD’S MOST EXPERIENCED MID-MARKET M&A ADVISOR

Oaklins offers a comprehensive range of services ● M&A advisory (buy- and sell-side) ● Growth equity and equity capital markets advisory

● Debt advisory ● Corporate finance services

professionals 700

countries 40

transactions5,000+

offices 60

sectors 15

Oaklins industry specialists

Distribution is one of our focus areas. Combining comprehensive sector knowledge with global execution has led Oaklins to become one of the most experienced M&A advisors in the distribution sector, with a large network of relevant market players worldwide. This results in the best possible merger, acquisition and divestment opportunities for distribution companies.

If mergers, acquisitions, or divestitures of businesses or business units are part of your strategy, we would welcome the opportunity to exchange ideas with you. Please find our contact details below.

Alex Kellison, AnalystJacksonville, USA

T: +1 904 354 9600

Don Wiggins, Practice Leader, LogisticsJacksonville, USA

T: +1 904 354 9600

Yaron Zimbler, DirectorJohannesburg, South Africa

T: +27 11 459 1869

About Oaklins

Adse de Kock, PartnerAmsterdam, Netherlands

T: +31 20 416 1303

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DisclaimerThis document is provided for information purposes only. Oaklins and its member firms make no guarantee, representation or warranty of any kind regarding the timeliness, accuracy or completeness of its content. This document is not intended to convey investment advice or solicit investments of any kind whatsoever. No investment decisions should be taken based on the contents and views expressed herein. Oaklins and its member firms shall not be responsible for any loss sustained by any person who relies on this publication.

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spot on distribution · spot on for the distribution sector: “the number of deals in the global...

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