MSC buys J&L

Apr 01, 2006 10:30 PM  By

Melville, NY-based maintenance, repair, and operations (MRO) supplier MSC Industrial Direct Co. announced on March 16 that it was purchasing J&L Industrial Supply, the catalog division of $1.8 billion Latrobe, PA-based manufacturer/marketer Kennametal, for $349.5 million.

Southfield, MI-based J&L had sales of $257.5 million last year. It serves customers through a 2,100-page print catalog and smaller mailings throughout the year, a Website, and a 140-person sales team. J&L’s senior management team, including president Michael Wessner, will remain with the business.

For the fiscal year ended Aug. 27, MSC had revenue of $1.10 billion, up 15% from $955.3 million the previous year. Net income during the same period climbed 38%, from $81.2 million to $112.3 million. In addition to mailing more than 28 million catalogs a year, MSC has a Website, more than 90 branch sales offices, and about 500 salespeople.

During a conference call regarding the deal, MSC president/CEO David Sandler said that “strategically it makes all the sense in the world for us… We have a long-standing relationship with Kennametal, and now we have an even more significant partnership.”

Sandler explained the reasoning behind the acquisition: “We’ve always said that we’re not averse to the right acquisition but that it had to be additive to our business so that the company performed better over the long term than it would have performed had we not made the acquisition. We firmly believe that this opportunity meets that significant hurdle rate.”

Sandler said there is a “relatively small” overlap between the two companies’ customer files. MSC targets primarily small and midsize businesses in a broad range of market segments, whereas J&L sells almost exclusively to manufacturers and shops that cut or finish metal.

The acquisition, which is expected to close in the second quarter, paves the way for MSC/J&L to be the exclusive U.S distributor of the Kennametal and Hertel lines of carbide cutting tools. The deal will also provide MSC with entry into Europe; about 10% of J&L’s sales come from the U.K.

“We’ve always felt any type of a start-up operation would divert us,” Sandler said, discussing why MSC has yet to expand overseas. “We’re better leveraged staying within our own shores. There are no plans to make any changes to the U.K. operation.”

The acquisition helps MSC bolster its presence throughout the Midwest and on the West Coast as well. The company, in fact, only opened its first California branch sales office, in Los Angeles, in 2005.

Kennametal, meanwhile, will focus on its core manufacturing businesses. It will use the proceeds from the sale to pay down debt, repurchase shares, and possibly acquire other companies.

“Accretive from the get-go”

Kennametal is “getting out of a business that they haven’t wanted to be in for a while,” says Harry Chevan, managing director at New York-based investment bank Gruppo, Levey & Co. “With J&L, they first spun it off about 10 years ago. Five years ago they took it back in. And Kennametal got a price that respects the repositioning and the rebuilding of the J&L business.”

Bruce Biegel, managing director for New York-based research firm Winterberry Group, estimates that MSC paid a multiple of nine to 11 times earnings for J&L. That would be expensive for a private equity buyer, he says, but because MSC’s stock price has doubled during the past year and the cost of capital remains low, “this is a good move,” he says. “It’s accretive from the get-go.”

And if MSC really wants to cut expenses, Biegel says, it could fold the J&L catalog into the MSC catalog. Given J&L’s estimated annual circulation of 31 million, “the synergies could be quite handsome.”

But Chevan doesn’t think that would be wise: “The last thing you want to do after an acquisition is start changing the brand.”