Market conditions prompt a change in Wesco’s financing of Anixter acquisition
Wesco International Inc. has decided not to sell equity to fund its acquisition of a competitor, after its stock lost half of its value in three months.
Instead, Wesco said on Monday that it will take on more debt in its pursuit of Illinois-based Anixter International.
The deal is valued at $4.5 billion and includes a combination of $70 in cash, Wesco common stock, and a newly created category of preferred Wesco stock for each share of Anixter stock that shareholders own.
The Station Square-based distributor of electric, industrial and commercial supplies wasn’t just reacting to the new coronavirus outbreak blamed for tanking stocks on Wall Street on Monday.
In fact, Wesco’s stock price began its descent soon after the company disclosed in late December that it was in a bidding war for Anixter against New York-based private equity firm Clayton, Dubilier & Rice, LLC. The stock’s decline accelerated in mid-January, after Wesco — having finally outbid its rival for Anixter — signed an agreement with the firm.
A day after the announcement, Moody’s Investor Service placed Wesco’s credit rating on review for a downgrade.
The level of debt that the combined company would emerge with was already a concern for rating agencies. But a sinking stock price, which commingled company-specific dynamics with broader market movements, unnerved investors.
The issue was clearly on the radar of Wesco’s CEO John Engel earlier this month as he touted the benefits of the acquisition at an industry conference.
“Equity is the most valuable portion of our capital structure. And we’re not interested in selling that at a huge discount,” Mr. Engel said when he was asked if the company would reconsider its plan to raise between $400 million and $500 million in equity.
At the same event, Mr. Engel said he wouldn’t be uncomfortable with taking on more debt.
“We’re very comfortable with leverage. We’ve always run with leverage,” he said. It comes with the territory of being an industry consolidator, which is a role that Wesco has been striving for.
Mr. Engel said he’s confident that the combined company will generate enough cash to pay down the debt in short order.
“You can’t always perfectly time acquisitions,” Mr. Engel said at the industry conference on March 3.
With its 9,300 employees, Wesco’s acquisition of Anixter will mean a combined company of 18,600 employees and $17 billion in annual revenue.
On Tuesday, Wesco’s stock was up 18%, markedly higher than the 5% rebound in the Dow Jones Industrial Average and the S&P 500.