Distributors on EU Spending Spree

Europe's ongoing economic problems may be creating acquisition opportunities for US-based distributors. Arrow Electronics Inc. (NYSE: ARW) and Avnet Inc. (NYSE: AVT) have announced the acquisition of three European distributors within the last two days. Neither company revealed what they paid for the acquisitions, but all are expected to be immediately accretive to earnings after the deals are closed.

Two of the buys are in the IT and related services space. Arrow on Monday completed the acquisition of the ALTIMATE Group, a $340 million value-added distributor of enterprise and midrange computing products, services, and solutions based in France. The company operates in eight countries across Europe including France, Benelux, Iberia, and the United Kingdom. Avnet on Monday agreed to acquire the $350 million Magirus Group, a leading pan-European distributor of data center solutions and services.

On Tuesday, Avnet expanded its reach in the interconnect, passive and electromechanical (IP&E) components space with the acquisition of $30 million Altron GmbH & Co. KG. The company is headquartered in Germany, where Avnet has a new state of the art distribution center. Altron carries leading IP&E lines Vishay, Kemet, Wima, Yageo, and FCI.

Both distributors have reported component sales in the EU have been soft since the end of last year. In their most recent earnings calls with analysts, Arrow and Avnet reported their component book-to-bill ratios -- a measurement of demand -- in Europe were approaching parity. However, recent data on manufacturing demand indicates orders are unlikely to increase in the near-term as all geographies falter. (See: US Manufacturing Report Bleak.)

Both companies have a history of offsetting weakness in one business, in this case, components, with strength in other segments. Arrow's global enterprise computing solutions Q1 2012 sales increased 15 percent year-over-year to $1.54 billion. Arrow's Q1 global component sales of $3.35 billion decreased 14 percent year over year. While Avnet's global computer business saw its revenue decline in its third fiscal quarter by 8.1 percent year-over-year to $2.52 billion, operating income in the Europe, Middle East, and Asia (EMEA) region increased 69 percent during the period. Avnet's global components business decreased 4.3 percent year over year to $3.76 billion during its Q3.

The acquisitions also continue a trend in the distribution industry toward global consolidation. Arrow and Avnet began their global expansion through the acquisition of European component distributors in the 1980s and in Asia beginning in the 1990s. IT acquisitions have generally followed the same track. Arrow and Avnet remain the two largest electronics distributors in the world, but face regional competition with strong players in both Europe and Asia. EBN/EETimes annual Preferred Distributors Survey provides more detail. A summary of the findings can be viewed on our Webinar here.