Another Big Deal: MSC Buys J&L Industrial

Melville, NY-based maintenance, repair, and operations (MRO) supplier MSC Industrial Direct Co. announced on March 16 that it was purchasing bought 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, a Website, and a 140-person sales team. J&L’s senior management team, including president Michael Wessner, will remain with the business following the acquisition.

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 approximately 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 swath 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.

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.”

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