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Wesco International: Transformative M&A Deal Is Highly Accretive To Shareholders

Jun. 05, 2020 11:39 AM ETWESCO International, Inc. (WCC)6 Comments
ValueZen profile picture


  • The company is set to acquire Anixter International in Q2 or Q3.
  • The new entity is also expected to double its EPS growth rate and expand its EBITDA margins by 100 basis points.
  • We believe there is an opportunity for long-term growth in the combined entity.
  • The market is heavily discounting the new capabilities of Wesco post-acquisition.

We see a long-term opportunity in Wesco (NYSE:WCC) shares. The company is set to acquire Anixter International (AXE) in Q2 or Q3 (pending closing conditions) for what is to be a transformative $4.5B M&A deal.

That said, the market doesn’t seem enthusiastic about the acquisition, as reflected in Wesco’s share price. It is not without merit though, as a big acquisition in times of great uncertainty and economic recession, is not a recipe for optimism.

Wesco is taking on a significant amount of debt to finance the acquisition of Anixter. They are offering a combined $2.82B in senior unsecured notes maturing in 2025 and 2028. A challenging environment adds more risks to a levered balance sheet. On a positive note, Wesco debt covenants are very lenient, with no maximum debt leverage covenant. Therefore, any decreases in EBITDA because of recessionary headwinds, which would balloon their debt to EBITDA ratio, is not going to trigger any rapid amortization measures, giving a lot of breathing room for the company to digest the acquisition.

We believe there is an opportunity for long-term growth in the combined entity. The acquisition makes a lot of sense too, as it would fortify the competitive position of Wesco in an industry that is still very fragmented, yet the market is pricing Wesco at a significant discount to its book value, at only 0.64x. Wesco’s 15-year average price to book ratio is 2.3x. The discount gives us an opportunity to acquire shares in a very well-run business.

The combined entity is going to have approximately 13% of the market share

The electrical distribution industry is very fragmented and is estimated to be a $114B industry. Wesco and Anixter, competitors before the acquisition, had less than 7% of market share each. With the two entities combining, on a pro forma basis, the new Wesco is estimated to

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ValueZen profile picture
My goal is for you to get a quick idea of what the stock is worth. I like for you to see me as the extended version of a ValueLine Tear Sheet. I go deeply into the financial statements in search for value. Sometimes I find it, sometimes not. But knowledge is cumulative in this business which is why I enjoy reading about companies. Lets work together. I am hoping that by reaching a wide audience I could learn from great investors. I am not here to convince you about my ideas. As always do your own due diligence.

Analyst’s Disclosure: I/we have no positions in any stocks mentioned, but may initiate a long position in WCC over the next 72 hours. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.

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Comments (6)

jimidean profile picture
Good article. Could you speak to the competitive landscape, in particular AMZN, and the potential long term threat it may pose. Thanks
Value Focus Investing profile picture
Here is what Morningstar said in regards to Amazon. "Some industry observers have speculated that Amazon’s emergence in industrial distribution is the beginning of the end for many incumbent distributors. Although we think the threat from Amazon should not be dismissed, We think Amazon would struggle to replicate Wesco's product expertise and high-touch supply-chain management offerings, which should prevent Amazon from taking meaningful share from Wesco."

I am not sure about this, but also heard similar things concerning AMZN killing drug distributors for years, and they still have not made much headway.
It would be helpful if you had discussed future outstanding debt totals, interest coverage and debt to EBIT ratios. Otherwise it's impossible for anyone to know if this is worthwhile or not.
People also remember Oxy's transformative acquisition, also funded by lots of debt, of Anadarko and how that turned out. The pandemic has made the importance of low or no corporate debt very very obvious.
It looks like Wesco is buying Anixter from a private equity owner, that alone is enough to discourage buying Wesco stock. In addition you say Wesco's culture can be adopted by the new company. Corporate cultures change very slowly and you imply that maybe Anixter has a different culture than Wesco. This could be trouble (remember Penn Central?).
jimidean profile picture
Anixter was a public company prior to the merger
Value Focus Investing profile picture
Comparing WCC to OXY is really a ridiculous comparison as OXY is a high decline rate oil producer sitting on the far right end of the global cost curve. The "D" in their EBITDA is a real expense(and a huge expense at that) as production would plunge if they would ever cut capital spending. Distributors can defer capex for years while they right size operations during downturns. Both AXE and WCC were both profitable and cash flow positive during the 2008 and 2009 recession.

The blog above does reference the WCC/AXE combo as having a DEBT/EBITDA in the 4.5 range and expected to be in the 2.0-3.5 range in two years if everything goes to plan. WCC was in the 4.5 range back in 2012 after they completed a rather large acquistion for EECOL, which was another distributor. This and a lot more info is in their most recent presentation
OXY is just a recent example of a disastrous exercise in empire building by corporate management. Several studies have concluded that less than 1/3rd of corporate takeovers add any value to the acquirer, the other 2/3rd's results are somewhere between marginal gains and total disasters. However mergers are great for CEO egos while executive pay is closely related to a company's size. Debt/EBITDA of 4.5 is fairly high; given the upheavals caused by the virus and government response, getting it down substantially seems rather optimistic. There is also no guarantee that the Fed's printing presses can continue to support the debt markets.
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