By Craig Webb, President, Webb Analytics
Do it Best's planned takeover of True Value's 4,500 members and $1.5 billion in buying power delivers a growth opportunity that far outstrips anything the co-op could do organically, President and CEO Dan Starr says.
"To be able to have that kind of scale represents a tremendous growth avenue that, I just don't know how you could achieve it any other way," Starr told Webb Analytics in an interview Oct. 15. "You certainly can't do it organically at any speed that makes sense." He said that he, Do it Best's board, and other co-op members who have contacted him "all look at this as a generational opportunity for growth."
True Value announced early Oct. 14 its plans to sell the bulk of its operations to Do it Best. As part of the deal, True Value filed for protection from creditors under Chapter 11 of federal bankruptcy law. True Value has asked the federal Bankruptcy Court in Delaware to designate Do it Best as the "stalking horse"--i.e. the lead bidder--for the company. Being the stalking horse gives Do it Best an advantage to win True Value, as it already has reached a sale agreement with True Value in which Do it Best would pay $153 million in cash plus assumption of certain liabilities and up to $45 million in trade payables.
The Bankruptcy Court filing lists True Value's assets as $100 million to $500 million and puts its liabilities at $500 million to $1 billion. The vast majority of both involve inventory.
True Value has been formally entertaining potential buyers since July, ultimately sharing confidential information with 17 of them under non-disclosure agreements.
But just because Do it Best won the bidding competition doesn't mean it will get all 4,500 True Value members. As independent dealers, they could switch to other distributors, most prominently Ace Hardware and Orgill. Indeed, Orgill issued a press release Oct. 14 declaring it will make sure True Value members are "maintaining uninterrupted access to products and services." It then pointed out more than 400 True Value members have converted to Orgill over the past two years, and another 65 are on schedule to switch. Orgill, it said, is "in a strong position when it comes to handling the additional capacity that may come from onboarding so many retail customers in so short a time."
Such quiet campaigning didn't faze Starr. "We can't necessarily assume that 4,500 companies are just going to roll over [to us]," he said "There's going to be some wooing and some persuasion going on."
Aside from showing competitive advantages, Starr believes Do it Best also has a leg up on other distributors in that it's a co-op, just as True Value once was. "I think there's a case that we can make that, culturally, this co-op is part of a heritage of how they have historically done business and this is the better home for them," he said.
A True Value deal would in effect double Do it Best's membership and increase its purchases by one-third over the $4.57 billion it made in the fiscal year ended June 30. The $1.5 billion in True Value purchasing power is roughly 10 times what Do it Best added on when it merged with United Hardware earlier this year. Will the co-op face logistical challenges"
"What you're pointing to is a legitimate concern," Starr said. "There's a lot of complexity when you have that kind of accelerated growth." In terms of capital needs, adding United Hardware "wasn't all that significant," he said. Buying True Value is much more significant.
"We've been engaged in a process of trying to optimize our network of distribution centers, and we'll continue to do that," Starr said. "And with that great increase in volume, part of that [optimization work] will immediately be an analysis of the distribution centers. ... You've got a lot of really important decisions to make there. So we're going to want to do that carefully, and we're no rush to do that. We really just want to make sure that True Value continues to operate as historically has, and then we'll make long-term decisions as we work down the road toward integration."