Supplying large retail chains is such an increasingly complex challenge for mid-sized manufacturers that growing numbers are looking to often-creative mergers and acquisitions for the plethora of resources they need to continue serving their huge customers. Simply making and shipping a good product at a reasonable cost are not enough. Plugging into the big leagues of merchandising requires, at a minimum, sophistication in cost controls, information systems, supply chain management, R&D, and proactive product innovation – a tall order for a modest-sized company with tight margins. Retailer demands for perfection Pressures to both bulk up and expand skill sets drove a series of recent deals among “big-box” vendors, including: * The merger of private-label personal care products makers Vi-Jon Laboratories Inc. and Cumberland Swan Holdings Inc. under the aegis of private equity firm Berkshire Partners; * Weiman Products’ acquisition of J.A. Wright & Co., which unites two venerable cleaning products makers; and * A reverse Morris Trust transaction designed to climax in a merger of small appliance producers Hamilton Beach/Proctor-Silex and Applica Inc. Carl DeMasi, President and CEO of Weiman Products, notes that “you have to be perfect with the big retailers” on a spectrum of supporting services which includes breadth of product line, on-time delivery, prompt inventory restocking, and proper identification through bar-coding and electronic coding. “The more important your presence, the better chance you have of maintaining the strategic relationship with the retailer,” he says. Nearly identical strategic issues pervaded the union of Vi-Jon and Cumberland Swan, although fortuitous timing influenced the unique deal format. Cumberland was owned by investors looking to exit while family-controlled Vi-Jon was seeking breakout expansion. They were put together by Matthew Salisbury of Edgeview Partners who then tested the market for a private equity investor, which led to the selection of Berkshire Partners as a player in the deal. Salisbury says the deal engineering worked because the companies matched on a number of levels, including personal simpatico and compatibility of products with little overlap despite a collective total of 7,000 items for the combined company. Ability to sell the deal synergies helped draw Berkshire. A deal rooted in synergies “With the combined company, we were able to show a lot more to the private equity market than if we had gone out alone,” he says. “And because of the synergies, we could go out to PE groups at a fixed price. But the deal was tough to put together.” Randy Peeler, a Managing Director at Berkshire, notes that operating challenges of the current marketplace belie the historic image of the private-label manufacturer as a make-it-fast, make-it-cheap imitator. To hang in with the big retailers, he says, private-label suppliers need to offer a strong volume of products, pay serious attention to logistics, and demonstrate the ability to create products that the retailers want. Networking gets deals started “They have to formulate the right product, get it to testing so retailers can see that it’s really equivalent (to name brands), and create appropriate packaging,” he says. “They have to be cost-efficient to compete but they also have to get the product right, get it out quickly, and make it look good.” One element that is expected to grease the way for more M&A among “big-box” suppliers is that the managements and owners, although often competitors, tend to know each other socially. That often leads to long courtships of attractive targets by the more acquisition-minded of the players. “It’s a very small community,” DeMasi points out. “We meet at trade shows and we all talk.” “There are a lot of players, but it’s a relatively small industry,” Peeler says of the private-label space. “People know each other and their capabilities.” Adding the jewelry and metal cleaners of 135-year-old J.A. Wright not only expanded Weiman’s product but also strengthened its distribution prowess. Wright is heavy in supermarkets while Weiman’s cook-top, granite, stainless steel, and other cleaners are fixtures in general merchandise chains. “We leveraged our distribution channels,” DeMasi notes, “and we solidify each others’ positions in the various retailers.” That’s a critical part of meeting the stiff demands of the major merchandisers which want in-stock levels of 98.5% of supplier’s products and everything else on their scorecards in the 98%-to-100% range, says DeMasi. “The last thing they want to do is buy one product from somebody,” he says, commenting on the need for scale. “They have set up their computers and supply lines to take seven or eight products from a supplier.” The vendor that doesn’t measure up “won’t be in those retailers very long,” he adds. “Logistics gets to be a very big part of it. Gasoline prices are up and severely impact delivery costs. If you’re not moving enough products, you’re going to have a hard time getting the large truck carriers to really service your account the way it needs to get serviced.” Naturals for follow-on deals The multiplicity of challenges suggests that both Vi-Jon/Cumberland Swan and Weiman will be back in the acquisition market to expand scale and offerings. For now, the post-deal priority at Vi-Jon/Cumberland is “flawless integration” and making sure customers are getting “as good or better service” than they did before the deal, Peeler says. “Down the road, we might think about doing acquisitions.” DeMasi says that Weiman is considering a number of compatible companies but how soon deals will materialize depends on “the attitude of the companies we’re looking at.” “We have lots of irons in the fire because only a few are going to catch fire,” he states. Forming an appliances giant The Hamilton Beach/Applica combination is designed to create the largest maker of household appliances – coffee makers, irons, blenders, toasters, etc. – in the country. Under the deal proposal, diversified NACCO Industries Inc. will spin off its Hamilton Beach/Proctor-Silex operation to its own shareholders. The newly independent unit will then merge with Applica, a publicly traded company based in Miramar, Fla. NACCO’s shareholder bloc would own 75% of the combined company so that the restructuring can be done tax-free. The resulting company, with projected sales of about $1.1 billion, would be named Hamilton Beach Inc. (c) 2006 Mergers and Acquisitions Journal and SourceMedia, Inc. All Rights Reserved. http://www.majournal.com http://www.sourcemedia.com

To read the entire story, you must be logged in.
Please log in now or register with us.
Register

How useful was this post?

Tell us more about your rating decision