Sun Distributors L.P.
Sun Distributors L.P.
1 Logan Square
Philadelphia, Pennsylvania 19103
Fax: (215) 665–3662
Sales: $612 million
Stock Exchanges: New York
SICs: 5084 Industrial Machinery & Equipment; 5039
Construction Materials, Not Elsewhere Classified; 6719
Holding Companies, Not Elsewhere Classified
Sun Distributors L.P. is a leading industrial distribution firm. The company sells more than 100,000 products and related services in three main areas of operation: fluid power, glass, and maintenance items. Sun’s customers are located throughout the United States, Canada, and Mexico. Founded as a subsidiary of an oil company, the company was spun off into a limited partnership in the late 1980s, commencing a period of strong growth through acquisitions of other businesses in its industry.
Sun got its start in 1975, when the Sun Company, Inc., an oil company perhaps best known for its Sunoco gas stations, purchased a distributing business, which supplied equipment and other materials to a wide variety of industrial customers. With this move, Sun hoped to create a financial counter–balance to its highly cyclical petroleum businesses. Sun established Sun Distributors as a subsidiary, and the company began to acquire other properties in the distribution field.
In entering the distribution field, Sun moved into an industry in a state of flux. In the years before World War II, most industrial distribution businesses had emerged as very small “mom and pop” organizations, which resold equipment to a very small segment of one industry. Because they were tied to the single narrow market that they served, distributors saw their financial fates rise and fall with those of their customers. In the wake of World War II, however, many of these businesses started to grow and diversify their product offerings and target customer bases. With time, larger companies started to buy up smaller ones, as the industry consolidated, and Sun became part of that process.
In August 1976, Sun bought Walter Norris, a distributor of hydraulic and pneumatic controls. During this time, the company also announced that it would acquire Kar Products, Inc., a distributor of fastening systems. This purchase was completed in February 1977, when Sun paid $31.5 million for the property. In November of that year, Sun paid $10 million for Unibraze. At the end of 1977, Sun had sales of $20 million.
Sun’s steady string of acquisitions continued in March 1978, when the company paid $3.6 million for the Atlas Screw & Specialty company. At the end of that year, Sun also bought the J.N. Fauver Company, a Canadian enterprise in the fluid power field.
In putting together a group of different companies, Sun sought to become a major player in the “value–added reseller” field, making the parts it provided to manufacturers more valuable and competitive through the level of service that went along with them. Traditionally, competitors in the distribution business had focused on price as the sole selling point for their goods, and the only way in which one company was differentiated from another. As manufacturing became more complex, however, the demands that customers made upon distributors also became more sophisticated, and service, which allowed industrial customers to work more effectively and efficiently, became just as important as price.
Although the products that Sun offered were relatively commonplace, the level of expertise that the company’s various subsidiaries offered in addition to the parts themselves helped the company’s offerings stand out in the marketplace. “They take over activities or functions performed by either the manufacturer or the customer and charge for them,” one industry analyst explained to Forbes. In this way, Sun’s operations strived to bridge the gap between the manufacturing economy and the service economy.
Sun continued to grow through acquisitions and diversify its operations in the early 1980s. In 1981, the company purchased the Special–T–Metals Company of Lawrence, Kansas. In late May 1985, Sun bought the Keathley–Patterson Electric Company, Inc.
By 1985, Sun Distributors had come to account for three percent of its parent company’s revenues. In the following year, the Sun oil company decided to sell off its non–energy businesses, and the company announced that it was seeking a buyer for Sun Distributors in the late spring of 1986. Shortly after that, Sun augmented its holdings again, when the company bought the Air Draulics Company.
In August 1986, Sun announced that it would sell off its distributor business to a group of the subsidiary’s executives, who joined with the investment bank Shearson Lehman Brothers to purchase the company in a leveraged buyout. In October, Shearson Lehman Brothers Holdings, Inc. bought Sun Distributor’s capital stock for $199 million.
At that time, Sun also withdrew from one of the market segments in which it had been operating at a loss. The company sold its pipe and steel business, the Federal Pipe and Steel Corporation, taking a $1.5 million pretax loss in the process.
After Sun Distributors was acquired by Shearson Lehman Brothers, in January 1987, the company was reorganized as a master limited partnership. Shearson reportedly chose this corporate structure to take advantage of a temporary loophole in tax laws. At the time, tax rates for individuals were much lower than those for corporations. By setting up Sun Distributors as a master limited partnership, the investment bank enabled investors to apply losses against the company’s profits, a practice otherwise impossible as a conventional corporation. At the end of ten years, Sun would be required to convert to a regular corporation and start paying corporate income taxes, or be sold.
In February 1987, all but one percent of the operating partnership of Sun Distributors was sold, in units priced at $10 each. Each unit consisted on one share of class A stock and one share of class B stock. Roughly 40 thousand of these units, or a quarter of the equity shares, were held by Sun’s management, and more than ten million were sold to the general public. Because of Sun’s status as a master limited partnership, and its two–tiered structure of stock offerings, investing in Sun became a complicated process for many potential stockholders.
Nevertheless, in the wake of its successful stock offering, Sun once again began to acquire companies. In July 1987, the company purchased the Warren Engineering Corporation, and by the end of the year, Sun’s annual revenues had risen to $426 million, which generated nearly $19 million of operating income. However, because of costs associated with its separation for its parent company, and its establishment as a master limited partnership and initial offering of stock, the company posted a loss for the year of $6.6 million.
In February 1988, Sun also purchased the assets of Glass Related Products, Inc. By this time, Sun’s string of acquisitions had made it one of the ten largest industrial distributors in the country. The company sought out entrepreneurial enterprises with strong management that put an emphasis on customer service. In addition, Sun had focused its activities on four fields: electrical supplies, such as light fixtures and cables; fluid power equipment for pneumatic and hydraulic systems; glass materials, for cars and mirrors; and maintenance products, such as cleaners, chemicals, nuts, and bolts. Within these areas, which encompassed 15 subsidiaries, Sun sold more than 100,000 different products.
Sun’s customers ranged from original equipment manufacturers and users of replacement parts, to construction firms and maintenance companies. Increasingly, in the late 1980s, these operations turned to “just–in–time” processes, a more efficient method of manufacturing which sought to reduce the amount of money spent on inventory and replacement parts. In order to implement just–in–time processes, manufacturers relied on quick delivery of parts and special services. This created a market niche for Sun to fill, and the company worked to develop the capacity to make specialized production runs at short notice. Big manufacturers, Sun’s chairperson, Donald Marshall, explained to Forbes,” can’t make a pump and a motor with 20 valves out of 1,000 coming out sideways. They can’t have salesmen running down to St. Joe to make a call on a guy who’s going to spend $1,000 a year or wants a little design help. This creates an opening for us.” All in all, Sun sought to sell the engineering and repair services that made its products better than those of its competitors.
Although, on the whole, Sun’s strategy proved effective, there were some areas of operation that proved weak. For instance, the company found it difficult to make a profit on its sales of electrical supplies, and was also struggling in the sheet glass market, where it was consistently undercut by low–cost competitors. In an effort to alleviate this problem, Sun cut back on its operations in this area, concentrating instead on tinted, beveled, or mirrored glass. As part of this process, Sun purchased Glass Related Products, Inc., in February 1988.
In managing its constellation of 15 subsidiaries, Sun adopted a hands–off approach. Because the company only sought to buy well–managed companies, it refrained from tampering with operations that were doing well already. Instead, Sun provided capital for expansion and expertise in the systems needed to run a distribution business. Because of this low–interference policy, Sun was able to keep the size of its central headquarters staff quite low, and the company was overseen from Philadelphia by just 13 people: the company’s chairman, four vice–presidents, four accountants, and four secretaries. Each of Sun’s four operating groups was administered by a vice–president, accountant, and secretary.
To further emphasize the decentralized structure of Sun’s corporate philosophy, managers of the company’s subsidiaries were not summoned to Philadelphia to report to their superiors, but were visited at the site of their businesses by the company’s president, who spent more than half of his year on the road. According to The Service Edge: 101 Companies that Profit from Customer Care, a book in which Sun Distributors was featured, Marshall told one Philadelphia business magazine that “behind our nearly half–billion in annual sales are thousands of employees who’ve built years–long relationships with thousands of customers. The surest way to destroy all of that would be for corporate–level staff to travel out there imposing a ‘generic’ model of the distribution business on each of the divisions.”
After establishing its corporate independence and raising capital through its stock offering, Sun moved aggressively to further expand its business through the acquisition of successful companies in its four areas of concentration. In 1988, Sun purchased the Gem City Electric Company, Air–Dreco, Inc., E & B Electric Supply, Inc., and E & B Electric Supply of Crosset, Inc. Over the next two years, Sun also acquired the A & H Bolt and Nut Company, Limited, Edwards Engineering Corporation, and Industrial Air and Hydraulics, Inc. In July 1990, Sun divested itself of an asset, selling the property of the Atlas Screw & Specialty Company. As a result of its steady growth through mergers with small suppliers, Sun’s revenues had grown to exceed $500 million by the time the company entered the 1990s.
At the start of the 1990s, however, Sun confronted a sharp drop in demand for many of the products it offered, as the industries it served felt the effects of economic recession. In response to these conditions, the company embarked upon a two–year program of cutting costs, adjusting the size of its operations, and maximizing its assets.
In addition, the company continued to make strategic acquisitions. In 1991, Sun purchased Hydra Power Systems, Rogers Wholesale Electric, Inc., and Activation, Inc. The following year, Sun’s leaders sought to renegotiate the debt that the company had amassed through its acquisition spree and agreed to a moratorium on further acquisitions for the next two years.
By 1992, Sun’s expectations for market recovery had proved overly optimistic. Therefore, management reassessed its plans and shifted the company’s focus, in hopes of promoting further growth. Specifically, the company decided to become more proactive in seeking growth, rather than responding to fluctuating conditions within the market as a whole. Accordingly, Sun made some major changes in its traditional operations. In 1992, the company changed the way it paid presidents of its subsidiaries, setting up incentive programs for meeting sales goals. In addition, the company’s headquarters staff became more involved in running the operations of its previously highly independent subsidiaries, to the extent that some operations were combined. Finally, Sun replaced the leaders of four troubled units, bringing in new managers.
In September 1992, frustrated by the restrictions imposed by the company’s high debt load, and the financial constraints of its status as a master limited partnership, Sun’s management announced that it had hired financial advisors to explore ways that the company’s value could best be maximized. The options under consideration included a restructuring of the company, sale of certain selected assets, or liquidation of the entire company. The announcement that this process was being undertaken contributed immediately to a rise in the price of the company’s stock.
By the start of 1993, Sun’s efforts to restructure had helped to contribute to a record of steady growth. Net profits had grown 14 percent a year for the last five years, despite the fact that sales had only increased by six percent. Although the company’s sales flattened somewhat in the first half of 1993, and earnings dipped, Sun’s fortunes had revived by the end of the year, and sales reached $656 million, a new high. The company’s managers attributed this growth to a re–emphasis on service and the exploration of new markets, a necessary alternative to growth through acquisition, banned until 1995.
Sun’s returns remained strong in the first half of 1994, as innovative operations, like repair centers in the company’s fluid power group, made strong contributions. In the fall of 1994, Sun announced that it had completed the process of internal re–evaluation of its assets and options. The company’s managers stated that they had decided not to liquidate Sun’s assets, but to shift the company’s emphasis somewhat, shedding operations in one of its four main business areas. In October, the company announced that it would sell its three electrical group divisions, long a source of poor returns. The concerns to be sold included the American Electric Company, the Keathley–Patterson Electric Company, and Philips & Company. Sun also divested itself of Dormán Products, a subsidiary of its maintenance group.
With the proceeds of the this sale, which totaled $73 million, the company planned to pay down debts and finance further acquisitions. Sun also hoped to move away from the period of financial stricture which had governed its operations in the early 1990s. In November 1994, Sun appointed a new president and executive vice–president, John McDonnell, as the company readied itself for an aggressive policy of expansion in its remaining core businesses: fluid power, glass, and maintenance. “Our strategy has been to acquire well–managed distributors where the present ownership has reached an age to go on to retirement, or on to something else, and there is no apparent succession in the family,” McDonnell told the Philadelphia Enquirer.
In addition, Sun planned to step up its burgeoning operations in Mexico. The company did a brisk business supplying manufacturing plants that had sprung up just over the border, and also planned to begin operations in central Mexico. As Sun moved into the late 1990s, its three remaining operating units appeared strong, and its status as a major player in the distribution field appeared secure.
S.D.I. Operating Partners, L.P.
Byrnes, Nanette, “Sun Distributors B: Out of the Partnership Trap,” FW, October 12, 1993, p. 18.
Simon, Ruth, “We Sell Service, Not Products,” Forbes, March 7, 1988, p. 98.
“The Man Behind the Power Is in the President’s Chair,” Philadelphia Enquirer, December 5, 1994.
Zemke, Ron, The Service Edge: 101 Companies that Profit from Customer Care, pp. 486–88.