MSC Industrial Direct Co. Inc. (NYSE: MSM) announced last month that it has signed a definitive agreement to acquire substantially all of the assets of the Barnes Group Inc. (NYSE: B). The purchase price will be $550 million and the asset purchase structure will translate to future tax benefits to MSM valued at more than $100 million. Run-rate cost synergies between the two are projected at $15-$20 million a year by 2015. This acquisition is expected to be completed by third quarter of the current fiscal year.
With this transaction, MSM will become a strong player in the fasteners and other consumable products segments. MSM's management expects that the transaction will be value-accretive to the company. It projects incremental earnings of $0.15 to $0.20 per share for 2014 and $0.30 to $0.40 in the following year. It seems that MSM bought Barnes reasonably at 1.8 times revenues, slightly higher than its average revenue multiples of 1.22 times.
Will Lawson Products Be the Next Target?
The acquisition is a clear signal that the North American MRO market is ripe for consolidation. While the deal will definitely increase the company's cash flow, this will put MSM into new product category and closer competition with Fastenal Company (NASDAQ: FAST) and Lawson Products Inc. (NASDAQ: LAWS). Lawson sounds like a good acquisition target for MSM if it plans to shore up its market share in the fastener category. It offers more than 300,000 different products for sale, of which approximately 60,000 are maintained in inventory.
Lawson recently reported earnings of $1.7 million during the fourth quarter. This is a reversal from the previous year's net loss. For the fourth quarter, management attributed the turnaround to its ongoing efforts to improve efficiencies and reduce operating costs. It has also made significant progress consolidating its distribution network. For the last five years, the company has experienced a decline in earnings by 34 percent a year. However, analysts expect that the company could grow its earnings by 11 percent for the next five years. Analysts have upgraded the stock to buy from the previous hold rating. It also pegged the price target at $20 per share, 31 percent higher from the current market prices.
The current market cap of $131 million makes the company an easy acquisition target for bigger players like MSM. The latter generates cash flow of around $277 million a year. At the current market cap, this would translate to 0.45 times annual revenues. This is significantly lower than Barnes' price tag of $550 million. Given MSM's thrust to expand into other niches in the MRO market, acquiring Lawson Products could be a good deal.
Assuming that the deal would not happen, Lawson Products remains a good investment in the long run. Moving forward, it remains on track at improving its earnings and cash flow. The market is expected to re-rate this stock given the current Barnes deal. At 1.8 times revenues, Lawson Products looks a 4-bagger stock in the making.
Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.