Last week, WESCO International Inc (WCC) acquired RECO LLC, a Cincinnati-based distributor of industrial products for an undisclosed sum of money.)
The acquisition is tiny compared to WESCO (RECO had sales of $25 million in its last fiscal year compared to WESCO’s $5.1 billion). Also, while WESCO has hundreds of partners, RECO is a distributor of Siemens AG (SI) products only. RECO does however, have six mid-western branches, which could be used by WESCO for the distribution of its industrial products.
Management was suitably optimistic about the combination, stating that it would be immediately accretive. Small tuck-in acquisitions that are immediately accretive are exactly in-line with WESCO’s growth philosophy.
In the distribution business, an acquisition needs to be immediately accretive because distribution companies usually operate on razor-thin margins. An acquisition that requires a lot of integration charges and restructuring could have a significant impact on cash flows, making operation difficult.
It is also extremely difficult (if not impossible) to generate high margins in distribution because of the highly fragmented nature of the market, the large number of players, limited scope for differentiation and severe pricing pressure.
WESCO has had some success however. The company expanded its national account model to a global account model, essentially tightening its relationships with OEM partners and attempting to provide the product breadth and geographical reach to become a one-stop shop for customers.
In the last quarter, WESCO saw broad-based strength in the industrial business spanning MRO, OEM and capital projects. While bid activity remained competitive, WESCO’s global account model worked in its favor. The company also stated that although the momentum in the industrial business would moderate through 2011, there would be some growth right through the year.
WESCO, whose closest competitors include Anixter International (AXE), W.W. Grainger (GWW) and privately held Graybar, is currently ranked #3 by Zacks, implying a short-term (1-3 months) Hold rating.
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