Business Context and Reporting Period
Company: WESCO International, Inc.
Filing Type: Form 8-K (Current Report)
Date of Report: October 25, 2006
Event: Announcement of an offering of convertible debt securities to finance the acquisition of Communications Supply Holdings, Inc. (CSC).
Acquisition Details: WESCO Distribution Inc. entered into an Agreement and Plan of Merger on October 3, 2006, to acquire CSC, a national distributor of low voltage network infrastructure and industrial wire/cable products. The transaction is expected to close by November 3, 2006, subject to customary closing conditions including antitrust review.
Key Financial Metrics
Acquisition Target (CSC) Historical Performance:
- Net Sales: $431 million (Year ended Dec 30, 2005); $285 million (Six months ended June 30, 2006); $508 million (Twelve months ended June 30, 2006).
- Estimated EBITDA: $32 million (Year ended Dec 30, 2005); $23 million (Six months ended June 30, 2006); $41 million (Twelve months ended June 30, 2006).
Note: Figures reflect the acquisition and convertible debt offering as if completed on Jan 1, 2005 (Income Statement) and June 30, 2006 (Balance Sheet).
| Financial Metric (in millions) | Year Ended Dec 31, 2005 | Six Months Ended June 30, 2006 | Twelve Months Ended June 30, 2006 |
|---|---|---|---|
| Net Sales | $4,851.8 | $2,886.3 | $5,477.3 |
| Gross Profit | $944.9 | $593.4 | $1,113.0 |
| Income from Operations | $229.8 | $189.3 | $322.5 |
| Net Income | $101.4 | $103.2 | $167.4 |
| EBITDA | $259.8 | $207.5 | $358.0 |
| Diluted EPS | $2.06 | $1.98 | $3.25 |
Pro Forma Balance Sheet (As of June 30, 2006):
- Total Assets: $2,301.7 million
- Total Long-Term Debt: $739.1 million
- Stockholders' Equity: $629.8 million
- Total Purchase Price: Approximately $525 million (cash).
- Convertible Senior Debentures (2.0% due 2026): $250 million principal.
- Revolving Credit Facility: $165 million principal.
- Accounts Receivable Securitization: $110 million principal.
- Escrow: $17 million held for working capital adjustments and indemnification.
Material Changes and Pro Forma Adjustments
The filing presents unaudited pro forma financial information reflecting the combination of WESCO and CSC. Key adjustments include:
- Revenue Growth: Pro forma net sales for the twelve months ended June 30, 2006, increased to $5,477.3 million compared to WESCO's historical sales of $4,421.1 million for the year ended Dec 31, 2005.
- Debt Increase: Total long-term debt increased to $739.1 million pro forma, driven by the new financing instruments ($525 million total) used to fund the acquisition and retire CSC's existing debt.
- Goodwill and Intangibles: The purchase price allocation includes approximately $261.2 million in goodwill and $148.0 million in identifiable intangible assets (customer relationships, supplier relationships, and tradenames).
- Interest Expense: Pro forma interest expense reflects the elimination of CSC's historical debt interest and the addition of interest on the new WESCO financing ($22.3 million for the year ended Dec 31, 2005).
Outlook, Risks, and Contingencies
Management Commentary:
The acquisition is expected to expand WESCO's product portfolio and geographic reach, particularly in low voltage network infrastructure and industrial wire/cable. CSC serves Fortune 1000 and large institutional customers through 32 branches.
Risks and Contingencies:
- Closing Conditions: The merger is subject to customary closing conditions, including the expiration of waiting periods under the Hart-Scott-Rodino Antitrust Improvements Act of 1976. Completion is not guaranteed.
- Termination Rights: The agreement may be terminated by mutual consent or if representations and warranties fail to be true and correct.
- Pro Forma Limitations: The pro forma financial information is for informational purposes only and does not reflect operating efficiencies, cost savings, or integration costs anticipated post-merger. It is not indicative of future results.
- Working Capital Adjustments: The purchase price is subject to adjustment based on working capital at closing, with $17 million held in escrow.
Investor Verification Checklist
- Regulatory Approval: Verify the status of the Hart-Scott-Rodino antitrust review and any other regulatory conditions required for closing.
- Convertible Debt Terms: Review the specific terms of the 2.0% Convertible Senior Debentures due 2026, including conversion rates and potential dilution.
- Working Capital Adjustment: Monitor the final working capital calculation at closing, which could adjust the final purchase price from the $525 million estimate.
- Integration Costs: Assess potential integration expenses and synergies not reflected in the pro forma financial statements.
- Debt Covenants: Review the financial covenants associated with the new credit facilities and subordinated notes to ensure compliance post-acquisition.