Although S.P. Richards only represents ~12% of GPC’s sales, its parent company’s shareholders will end up as the majority owners of the new, more focused company. Specifically, GPC shareholders will own 51% of the combined entity with Essendant shareholders controlling the other 49%. This effectively values S.P. Richards at ~$680m. As part of the deal, GPC will also receive a cash payment of over $300m.
The new management team will look a lot like the old Essendant management team with President & CEO Ric Phillips and CFO Janet Zelenka retaining their roles and titles. S.P. Richards’ President Rick Toppin will become COO of the new entity. The board will be led by ESND’s current chairman, but Essendant will control only three board seats compared to GPC’s four. The remaining four board seats will be mutually agreed upon by both parties. While seemingly small details, these things often take a long time to negotiate.
The combination creates ‘a stronger, more competitive business products distributor with greater scale and service capabilities and an enhanced ability to support customers.’ That scale is needed because the ‘business products’ (think office supplies, Dunder Mifflin) industry is facing numerous threats. Amazon is always the 800-lb gorilla in the room, but e-commerce in general has changed consumer behavior and allowed for more competition. Demand is also soft which has led to declining sales and profitability at Essendant. As proof of the difficulties, the combined company would have had pro forma 2017 net sales of ~$7b, but only ~$300m of ‘adjusted EBITDA’. That’s a mere 4.2% adjusted EBITDA margin, which was adjusted by assuming all of the $75m of expected synergies are achieved at no cost. Strip that away and you end up just slightly over 3%. Not a lot of breathing room there.
The strategy is sound though and bulks up two players with differing strategies in the hope that the combined entity will be able to take the best of both and grow from there. Apparently, S.P. Richards has a more traditional business model serving business customers while Essendant mainly operates via web portal. Thomas Gale thinks one of the big questions will be whether or not they can integrate the two different cultures in time in order to face the outside threats. That said, he does think there is plenty of opportunity:
The opportunity that Essendant/SP Richards now has is to build an integrated channel model that was not on the table when these two companies were competitors. Historically, both companies have supported their dealers in M&A activity to retain the business. Essendant now has the capability to build out what is probably best described as a franchise multi-sided model that combines characteristics of an Ace Hardware model with a broader marketplace model. The “new” Essendant can aggregate the unique services and last-mile capabilities of its dealer network, while building deeper partnerships with Amazon and other digital marketers with a value-added proposition for complete customer coverage.
Since we are just into baseball season, let’s sum it up this way: the combination of Essendant and S. P. Richards solves some immediate problems for both managers; the big question is whether the new team runs out of innings before it learns how to play together. And it’s definitely not the same old ballgame.
Essendant’s shares jumped on the news and closing seems likely since the deal has already been approved by the boards of both companies. Although anti-trust concerns sunk the 2015 Staples/Office Depot deal, the smaller sizes of these entities should make that much less of a concern. Assuming all goes well on the regulatory front, the deal should close by the end of year, which is also the expected timetable for the spinoff.
Disclosure: Author holds no position in any stock mentioned,
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