Money talks: M&A activity heats up in rubber distribution market

On the surface, the business of distributing industrial and hydraulic hose—as well as other rubber goods—doesn't seem that exciting.

But it's obviously caught the fancy of many, as merger and acquisition activity has been through the roof for the past year-plus—after being eerily quiet through the early phases of the coronavirus pandemic.

There are sellers that are looking to transition to the next phase of their business, some looking to cash out and retire, while others want to stay but don't have the financial wherewithal to properly fund the growth they had envisioned.

On the flip side, there are buyers who see hose and other related distributor firms as solid companies that are often serving critical markets, which the buyers see as providing very real opportunities for both top and bottom line growth.

And it's clear that there are ample potential buyers in the market looking to start or build a platform or portfolio, but it's still imperative that sellers know what they want to accomplish by divesting—and that they pick the right partner to help them achieve that goal.

Platte River Equity is a Denver-based private equity firm that invests in established lower middle market operating companies within targeted industrial sectors. And one of those market segments is industrial rubber distribution, as it invested first in 2022 in Belt Power, and then late last year in bringing together Tipco Technologies Inc. and HydraTech Industrial Solutions.

Managing Director Peter Calamari and Principal Mike Reilly see great opportunity in the future of the platforms.

"Part of it is the diversity. It's infrastructure, transportation, government, manufacturing, and energy and gas. It's a little bit of everything," Calamari told Rubber News. "So you have great diversity, you have tons of customers. You're not at risk of losing any one business.

"A big part of it is that it's MRO-driven. A vast majority of these businesses are driven by mandatory replacement. If a hose breaks, you have to fix it. ... And then the third is it's really value-add. We don't like distributors where it's just breaking bulk. We want a distributor that's touching the product, that's really ingrained with their customers, providing those kind of value-added services."

Jeff Crane, CEO of Pittsburgh-based LGG Industrial (Eriks North America until a recent rebranding) said there are a number of reasons for the recent pickup of M&A in the rubber distribution space.

It's still a relatively fragmented market with a lot of small and regional players, along with aging ownership and family businesses where a second or third generation wants to transition their business to the right owners.

M&A activity also follows economic cycles, Crane said. Just as there was a pause during the Great Recession in 2008-10, the pandemic caused a similar slowdown. But as that pain disappears in the rear view mirror and businesses recover, they are thinking more seriously about selling.

"And you've also got buyers that are now getting their toes back in because they're a little bit more comfortable with the assets that they're looking to buy and the value that they're getting for them," Crane said.

LGG Industrial itself was purchased by private equity in 2022, and since then has resumed an active role in the M&A scene, one that had been part of the company's history until recent years.

"You know fundamentally it's a way for us to create value in our business. It helps us expand our geographic reach. It helps us expand our product and service offering," Crane said.

And with the backing of new owners LKCM Headwater Investments, LGG is looking to add on at the forefront of its growth strategy. "They're very well aware of the opportunities that the industrial distribution space affords," he said. "They've been quite acquisitive themselves and love the idea of doing add-on acquisitions."

Singer Industrial has been growing over the past quarter century, largely through acquisitions in the hose and industrial rubber distribution. It has closed on 11 deals alone since the start of 2023.

Singer Industrial CEO Craig Osborne said the company, backed by private equity firm AEA Investors L.P., has several criteria when considering potential acquisition candidates.

"We look for growing, well-run businesses. We don't have extra team members to drop into newly acquired businesses, so we like something that is already running well," he said. "We also look for owners that want to stick around and continue to grow with us. If they don't then we will look for strong leaders behind them."

The third factor they weigh is finding companies with good end markets—in short, business sectors that aren't cyclical.

The oil and gas market, for example, typically isn't attractive to Singer Industrial because of the wide swings in business. On the contrary, others like agriculture, construction, and food and beverage are areas that always bring interest.

Crane said LGG Industrial, likewise, isn't looking for fixer-uppers. They are looking for well-managed, stable—if not growing—businesses that are profitable.

And this means filling a geographic hole in their footprint, or getting into new product and service categories.

"When we look at their business, we're looking for opportunities to grow them faster than they would otherwise be able to," he said. "And that means taking their unique capabilities or services that they offer, and using our dozens and dozens of inside and outside salespeople to use our scale to grow those capabilities and sell those capabilities on a broader scale than these businesses could on their own."

Platte River Equity's Calamari said if a company is looking to sell and has a strong customer base, good margins and a stable track record, there will be a number of potential buyers. Conversely, sellers need to be careful about picking the right partner.

"Oftentimes these owners have spent their entire lives building these businesses, so it's, 'How are you going to treat my legacy?' " said Reilly, the principal at Platte River. "And that legacy is comprised of employees they've been working with, and building the business with their customers and their suppliers.

"And even though you know in some cases they're sticking with us and staying around for the next chapter, in other cases, they're retiring and selling the business. They're focused on making sure that their employees and other stakeholders are treated well."

Platte River is choosy in the businesses it invests in.

And while as a private equity firm they will look to get liquidity on their investment at some point, they get the best return on investments when they go in with a long-term mindset.

"I think you know our firm is a little bit different in that we want to invest in and run this business like we would own it forever," Calamari said. "That means doing the right thing for the employees and the customers and the suppliers, and investing capital into the business to expand our capabilities."

Of Tipco, he said Platte River has high expectations.

"We think this market is a great opportunity to build Tipco, and we're going to try to pursue that aggressively. And I don't think it's implausible for us to triple or quadruple the size of the company during our ownership period," Calamari said.

Osborne said that with a majority of sellers staying on at least some period of time, Singer Industrial can take some of the complexity of the back office tasks like accounting and benefits programs off their plate so they can concentrate on why they got into the business in the first place—helping customers grow and solve their problems.

"That's the essence of our pitch, 'We have the resources to help you grow your business faster and allow you to fully focus on the customer,' " Osborne said.

Crane urged potential sellers to think very hard about fit, as buyers can have different strategies and motivations.

"What I hear from the people that we talked to, and certainly the deals that we've gotten done, this is about finding the right homes for that business long term," he said. "... Who is going to be a good steward of that? It's an obligation that we have and we take very seriously that we are going to not only be the next owners, but the stewards of that business going forward. And that means taking care of the people and taking care of those important relationships."

While Crane doesn't know if he would call the current M&A climate a "seller's market," he does think owners are wiser than in the past. "I think the fact that private equity and more distributors have been acquisitive, sellers have gotten smarter simply because of all of the activity, and the fact that this has been a hot topic for the last 20-plus years," he said.

Rob Lyons, as co-CEO of Tipco Technologies, is in a good position to give advice to distributors who may be looking to sell their business, having just gone through that in selling his company to Platte River.

With so many owners beginning to reach that "certain age," personal decisions are really creeping up for a lot of companies in the distributor industry. And they have some decisions to make, even if they want to stay involved.

"Do they want to invest in a new ERP system? Do they want to invest in E-commerce and do they want to invest in a powerful CRM?" Lyons asked. "And I think that's where a fit with a larger entity really helps because we could take that all off of your shoulder and let the local entity do what they do, and that's go win market share."

He and others in the rubber distribution business have had conversations about how the industry is going to continue to shrink.

"But I do see new entrepreneurs opening new businesses in our space and becoming very successful. At the end of the day, it's still about people, regardless of the consolidation."

And there are great opportunities for both sides of the buyer/seller equation, he said, and that means there needs to be frank discussions on "what good would look like for both parties."

"Distributors should ask very hard questions to the folks who want to acquire them," Lyons said. "They've built great businesses. ... So my advice to them is ask very tough questions, and make a decision that's in the best interest of your family and your employees."