WESCO International is a distributor of products and supply chain services for the industrial, construction, utility, commercial, and government markets. With 400 full-service branches and over 1M products, WESCO is a major player in the distribution market. Due to a number of factors, including softening demand in construction markets, rising commodity prices, and an eight-year low in industrial demand for power, WESCO experienced somewhat disappointing margin performance in 2009, leading management to engage in a series of strategic cuts, including reducing headcount by 16%, reducing the number of branches, and enacting a number of discretionary spending freezes.
Despite the challenging market conditions and overall reduction in SG&A, management invested aggressively in the front end of the business, expanding the sales force by 5% in 4Q09. WESCO generates more revenue per employee compared to its industry peer group. Additionally, management organized a dedicated group to identifying opportunities to capitalize on the federal stimulus. WESCO also expanded international operations by establishing subsidiaries in China, Australia, and Africa. Overall, analysts are optimistic about the company’s future financial performance, growth opportunities, and overall direction and management.
WESCO has a strong history of deal activity. Due in large part to the overall trend in the distribution market towards increased consolidation, WESCO has been active, completing 34 deals since 1998, seven of which have been completed since 2004. Currently, WESCO holds 7% market share. Management notes that the economic downturn has negatively impacted the smaller players in the distribution industry, who may be looking to WESCO as a potential buyer. While the company remains open to accretive acquisitions, management is also firm in their stance that any potential deal must meet their profit expectations. WESCO is not currently engaged in an ongoing acquisition.
Revenue in 2009 was down 24% compared to 2008, due in large part to serious declines in WESCO’s major markets. Operating margins declined to 3.8% in 2009 from 5.4% the previous year. While gross margin was steady QoQ at 19.2%, this was down 70bps from the previous year, due largely to inventory reduction and less volume rebates. SG&A was down $140M from 2008, a 17% decrease. While some of this reduction was due to discretionary spending freezes on bonuses and similar line items that are expected to return in 2010, the company did manage to realize savings of approximately $70M in net permanent structural cost reductions. WESCO’s liquidity is solid, with analysts estimating the company is capable of generating approximately $75M in free cash flow in 2010. Management anticipates 2010 capital expenditures will be approximately $20M for growth initiatives. Additionally, management intends to convert 85% to 90% of 2010 net income to free cash flow.
Latest article published by Wyatt Matas & Associates discusses the issues of confidentiality throughout the M&A process. With the rise of strategic buyers looking to acquire competitors and across business lines, confidentiality is in the forefront of every potential sellers mind. The article discusses strategies on how to manage the M&A process so that confidentiality breeches are not a problem for either the buyer or the seller.
A confidentiality agreement is typically the first agreement entered into by the parties considering a potential merger or ac¬quisition. While seemingly straightforward, the issue of confidentiality is often critical to the success or failure of the transac¬tion. Both buyers and sellers have several key reasons to be concerned about confidentiality, including client/customer and employee reactions, market intelligence, and competitors.
2010 continues to show signs that merger and acquisition activity will increase, such as increased confidence in private and public sectors, companies with plenty with cash on hand, and improving economic indicators. As such, sellers in 2010 and 2011 can reasonably expect that they will encounter an M&A market with multiple targets looking to be acquired and an increased number of buyers looking to pay better multiples.
Wyatt Matas & Associates expects strategic buyers (competitors or those in similar businesses as the seller) to be the most active buyers and be willing to pay bet¬ter valuations. Financial buyers are still reliant debt markets to finance much of the transactions, which have yet to work themselves out. To this end, managing the vetting of the buyer, due diligence, and transaction process while maintaining confidentiality will be very difficult and more important.
Given the challenges in protecting confidentiality, companies should consider the following to help mitigate risk, manage confidentiality, and ensure a smooth transaction process.
While a confidentiality agreement is typically the first agreement to be entered into during a M&A transaction, the importance of confidentiality starts when the seller decides to pursue a sale.
The following are key points for confidentiality in the beginning of the M&A process:
Limiting exposure early on is key. Those sellers that plan on using an M&A advisor should be careful to pick an advisor that can access key decision makers directly. Do not sign with a broker that “lists” businesses for sale on websites, blast faxes or emails. These approaches are typical for business brokers. The vast majority of responses to business-for-sale advertisements are not serious or qualified. Businesses need to protect exposure to only serious buyers during this process. A broker will place a blind ad to attract interest and prematurely divulge information before appropriate buyer due diligence has been preformed. Typically, an investment banker will vet a potential buyer before contacting them and have the credibility to access C-level executives directly, assuming the strategic route is the preferred strategy. This allows for a frank conversation about the real interest of the potential buyer and how confidentiality will be handled within the buying company.
Identify potential warning signs early in the process. While time consuming, the potential buyer vetting process is critical to protect confidentiality. If asked in a blind call without the appropriate due diligence, most potential strategic and financial buyers will initially express interest in reviewing the seller’s “selling documents,” if only to gain insight into a competitor or industry. While these selling documents are a necessary part of the acquisition process, only those qualified buyers should receive such documents. The vetting process should serve to identify potential buyers’ business plans, legal structures, competition approvals, and other strategic considerations that could potentially enhance or derail the deal later.
Avoid premature disclosure. As mentioned above, it is necessary to disclose certain information about the seller’s business in order to have productive conversations with potential buyers. However, sellers have significant motivation to avoid the premature disclosure of certain information that might do irreputable harm to the business if the transaction does not close or if they do not decide to sell. Failing to manage the release of information or preparing for the inevitable rumors surrounding a deal can result in several unfavorable consequences:
• If employees learn their company is looking to sell, they may quit out of fear of the unknown. Disruptions in staff or operations can serve as a deterrent to potential buyers to continue the deal.
• Competitors may use the information to undermine your company’s standing with clients/customers and other business partners by painting an air of weakness or uncertainty.
• If there are negative issues within the selling company that will eventually need to be disclosed to a potential buyer, managing the release and positioning of that information is essential to preventing the derailment of the transaction.
Maintain confidentiality throughout the transaction. Confidentiality does not stop with the introduction of the selling company to one or multiple buyers at the start of the acquisition process. Protection of confidentiality continues through the transaction process all the way through the closing of the potential deal. This requires some give and take from both the buyer and seller. The seller wants to be assured that the transaction will close on the terms agreed to in the letter of intent, and the buyer wants to be assured that they are buying what they were presented during the pre-LOI stages. Protecting confidentiality during this stage of the transaction requires a firm hand on the seller’s part where appropriate, but a willingness to compromise once milestones are hit by the potential buyer.
If a transaction is being managed properly, weekly calls between the buyer and seller will take place to update each side on the progress of the transaction. Part of the weekly agenda should be a discussion of confidentiality issues that might develop in the coming week. This reminds the buyer that confidentiality is important to seller and addresses how to proactively handle specific areas of concerns before they occur.
Ensuring confidentiality in the M&A process is key for a successful deal. While deals typically do not suffer from too much discretion, a failure to limit exposure, manage information, and protect information can derail a transaction and have negative consequences for a company. Enlisting the services of an real advisor helps to ensure appropriate confidentiality throughout the transaction.
Quarterly Overview: Odyssey Healthcare turned in a record quarter that can be attributed to expense management, lower Medicare cap rates and a reduction in bad debt expenses. Aggregate admissions were up 4%, but same-store-sales were up only 1%. Q1’10 admissions were 12,744 patients, while discharges were 12,692. The specialty programs continue to be a major focus for the company’s marketing effort; particularly, their COPD specialty program. These programs enhance care by assessing patient needs based on their terminal diagnosis. The programs give Odyssey the ability to expand acuity capabilities, allowing for a greater gain of market share through diversification of services. Odyssey has developed four other programs that it intends to release over the next few quarters in an effort to jump start admissions. The Company changed its corporate logo, but indicated it remains committed to keeping its local brands of VistaCare, Avalon and Odyssey Hospice. The Company is spending a significant amount of time and effort to better train the local sales force. This includes training on the CareBeyond specialty programs and developing a marketing dashboard. The marketing dashboard will give local sales people daily feedback, goal progression and access to referral information and tips on how to market to them. With the Company’s success of managing the expense side of the P&L, they are clearly turning their attention to growing the revenue side.
Acquisitions and Market Developments: Odyssey completed no acquisition in the 1st quarter; however, the company said it was active on the business development front. Most of the discussions are in the early states with nothing imminent. Management remains very price sensitive, as they should with their own Enterprise Value/EBITDA trading at only 7.06 times. While this shows discipline, it also suggests there is a disconnect between buyers and sellers with sellers’ expectations above reasonable market valuations. The Company did consolidate two Medicare provider numbers into one and had two programs certified by Medicare (OR and CA). The Company now operates 92 Medicare certified programs. According to the recently filed 10-Q, Odyssey received an administrative subpoena for records from the HHS Office of Inspector General (OIG) requesting various documents and certain patient records of one its hospice programs relating to services performed from January 1, 2006 through December 31, 2009. These types of issues tend to work themselves out and do not seem to be a distraction for the company.
Financial and Operational Performance: Total revenue increased yr/yr by 2.4%, but was down 1.1% sequentially to $171.5M. Net patient revenue per day was $154.63. The average daily census (ADC) has only grown only 1% from the prior year; however, operations are now significantly much more efficient, and the company has improved cash flow. We expect management to turn more of its attention to growing its ADC whether organically or inorganically. Average Length of Stay (ALOS) was up to 87 days, which was up 4 days both sequentially and yr/yr. This is was primarily due to patient mix. Gross margins reached 43.8%, its highest level since Q2’05. Primary contribution to this margin improvement has been the use of technology by field staff. G&A expense also declined to 27.4% of revenue as the company leverages its corporate and program overhead. Adjusted Operation Expense Per Patient Day was $132.03 for the 1Q’10 compared to a year ago, $137.19/Patient Day. The improvements in GM and G&A expenses resulted in record EBITDA margins of 14.6% of revenue. Long-term, management believes EBITDA margins will run in the 13%-13.5% range. Odyssey continues to hoard cash, accumulating another $11.9M in the quarter. This was primarily achieved through improved expense management and a reduction of DSO from 58 to 56. Currently the Company has in excess of $141M of cash on hand and plans to pre-pay $29 million in debt in 2Q’10.
