By Chris Jensen, Editor/Founder/Principal
True Value Company, the Chicago-based co-op, announced on March 15 that it has entered into an agreement to sell a controlling interest in the dealer-owned co-op to ACON Investments, a private equity investment firm based in Washington, D.C.
True Value was rumored to be for sale last year, although company officials at that time denied anything was in the works.
Under the terms of the agreement, ACON will make a strategic investment in the new True Value operating company. ACON’s investment will result in current True Value retailers having 70 percent of their invested capital, 100 percent of their promissory notes and the 2017 patronage dividend of $20.6 million repaid following the deal’s close.
The deal represents $229 million in returns and credits to current True Value retailers, who would retain a 30 percent holding in the new True Value Company. If approved by member shareholders this deal would end True Value’s 70-year run as a dealer-owned cooperative.
True Value’s board of directors—which consists of five outside directors, five True Value members and President/CEO John Hartmann—is unanimously recommending this transaction. The board believes that this deal represents a unique opportunity to accelerate the transformation of the business while also delivering compelling financial and retail benefits to True Value retailers.
True Value members were informed of the deal’s details via a webcast, with further information posted on a password-protected site. Recorded videos from all board of directors were also posted on the co-op’s Membersonline site. Voting will take place until April 12, and if approved by a majority of retail shareholders the deal could close as soon as April 18.
The Hardware Connection has learned that the new board of directors would consist of
CEO John Hartmann, three spots for ACON representatives and one spot for a True Value retailer.
Although True Value has not responded to our questions, in a prepared statement True Value executives outline the benefits for member-owners as follows:
- Return of majority of invested capital: Current True Value retailers
will have 70 percent of their A and B stock ($136 million) and 100
percent of promissory notes ($72 million) repaid along with the 2017
patronage dividend of $20.6 million following the close of the
transaction, representing a return of approximately $229 million to
invest how they know best. Of that total, approximately $196 million
will be paid in cash and approximately $32.7 million will be credited
to eliminate amounts owed to the company.
- Ongoing stake in the new True Value: Current retailers will retain a
30 percent holding in the new True Value Company, allowing them to
share in the additional value the company hopes to create in
partnership with ACON.
- Volume and growth rebate program: A volume and growth rebate
program will keep the cost of doing business with True Value
substantially similar for retailers.
- No new investment required for current or new customers: There will
no longer be a requirement to purchase stock to be able to purchase
products from True Value, freeing up members’ and customers’ capital.
- No national advertising fee: The previously announced commitment to
eliminate the promotional advertising fee will be upheld. True Value
will continue to offer retailers à la carte marketing and advertising
programs that will be customizable to help promote their businesses
- Access to nationally recognized brand: Retailers can continue to use
the True Value brand, which gives them access to the trademark for
use in their stores and advertising programs as well as other
brand-related programs like ship-to-store.
“True Value and our retailers have been on a journey of progress together, as we have implemented our long-term strategic plan and invested in the business. As the retail industry continues to experience unprecedented change, we must ensure that True Value stays ahead of that change, so that we are best placed to support the independent hardware retailer for decades to come,” said Hartmann. “As we have said consistently we must always seek methods to accelerate our strategy and we believe that this partnership offers us a unique opportunity to do just that. As the only branded national wholesaler without a membership requirement, True Value will lead the modernization of the business model in this channel.”
Hartmann continued, “We are very excited to be partnering with ACON, which has an impressive track record and highly relevant experience and expertise. We believe this is a fantastic opportunity for our retailers that will allow them to unlock the substantial majority of their investment while accelerating the transformation of the company to better serve our customers. We look forward to discussing the compelling benefits of this partnership with all of our retailers, and we are confident that they will support this initiative as the best way to ensure the long-term viability of the independent hardware retailer.”
“We have long admired the iconic True Value brand and have been impressed with the robust business that its retailers and support team have built together,” said Aron Schwartz, managing partner of ACON. “We strongly believe in the future of the independent hardware retailer and fully support the strategy that John and the rest of the True Value team have put in place. We look forward to working with True Value’s current leadership team to accelerate this strategy and better support retailers’ independence, growth and profitability.”
Who Is ACON?
ACON Investments is a middle-market private equity investment firm that was founded in 1996. They partner with management teams across a wide range of industries in the U.S., Europe and Latin America, managing about $5.5 billion of capital in a portfolio spanning more than 60 investments.
A number of ACON’s deals have been in the energy sector. ACON acquired Mariner Energy from the ashes of Enron’s bankruptcy in 2004. Other brands in their portfolio include Igloo Products, Cool Gear International, Borden Dairy and Spencer Gifts.
ACON identifies, buys and flips undervalued or distressed companies, typically holding on to their investments for about five years. The firm funds its investments primarily by attracting other private equity investors as limited partners. True Value and ACON have not identified who the limited partners might be in this deal, if any are involved.
How Healthy is True Value?
True Value Company is the industry’s third-largest, retailer-owned wholesale hardware cooperative with revenue of $1.5 billion in 2017. True Value has not released its fourth quarter 2017 or full-year 2017 financial results, although it has shared those figures with True Value retailers on their intranet site.
The co-op reported 2016 revenue of $1.514 billion, 2015 revenue of $1.497 billion and 2014 revenue of $1.495 billion. Net margin fell from $41.1 million in 2014 to $19.01 million in 2015 and $23.07 million in 2016. The cash portion of the patronage dividend was $21.3 million in 2016, up from $19.0 million in 2015.
The True Value cooperative includes about 4,400 independent retailer locations from 3,400 shareholders worldwide operating in 60 countries under the store identities of True Value, True Value Rental, Grand Rental Station, Taylor Rental, Home & Garden Showplace and Induserve Supply.
Although no figures have been released recently, True Value reported 4,392 stores at the end of 2016, down by 74 from the end of 2015.
True Value has not revealed exactly how many hardware store members it serves, but the co-op serves about 260 Home & Garden Showplace members and about 400 rental members. TruServ Canada stopped being part of the U.S.-based cooperative in 2001.
The co-op owns and operates a paint manufacturing plant in Cary, Ill., that is 612,000 square feet. As of January 1, 2016, it owed $14.29 million on a mortgage for its Manchester, N.H., distribution facility as part of a 20-year mortgage that matures on January 1, 2026.
In 2002, True Value sold seven distribution centers to third parties and agreed to lease them back for 20 years. That cost—which amounts to $1.59 million in 2018—can be viewed as ongoing operational leases in financial statements. It owes $147.88 million for operating leases for real estate and equipment, with $28.06 million of that expense coming in 2018. True Value also owes $4.58 million for capital leases from 2018 to 2021.
True Value had $4.047 million in cash and $145.6 million in available unused borrowing capacity under its revolving credit facility at the end of 2016. A senior revolving credit facility was amended in 2014 and extended to December 2019, with an increase to $450 million total. Since that time, True Value has borrowed money to fund working capital, capital expenditures, pay patronage dividends and to provide financing for remodels and new stores.
True Value has two defined benefit retirement plans that have been frozen since 2008. They were unfunded as of 2016 in the amounts of $15.7 million and $13.4 million. The company had $382.3 million in inventory at the end of 2016.
What Are True Value Members Saying?
The response from True Value members has been mixed so far, although some have changed their opinion from negative to positive after hearing more details about the deal from their field team representative or the informational site.
True Value retailers and retailers from other wholesalers were quick to weigh in with their concerns on Hardlines Digest. What follows is a sampling of the comments posted by True Value retailers.
“Not sure how this can be a bad deal, especially for members of the co-op. We get paid our $220 million dollars to control ourselves. No risk of accounting errors. How can that be bad? In addition, the company now will have no debt. The company will also have money to invest in itself,” said Steve Fusek of Fusek’s True Value in Indianapolis.
“The company is well run. Management is taking us in the right direction. We now have no national advertising fee; instead it is all à la carte —buy what makes sense for your own business. It should make business very simple to conduct and with cash in our pocket,” he added.
“Do you guys really want all of your retirement funds in the control of the co-op and at risk with no control over it? This is the first move of the three major co-ops. Look at your investment in your co-op—does that really make sense? I have yet to speak with a member that did not think this was in the member’s best interest. Happy to be with this forward-thinking company. More good things to come,” Fusek concluded.
Doug Johnson of Johnson True Value Hardware in Mt. Pulaski, Ill., said, “I look forward to a cash injection into my own store and the freedom to choose where the money is utilized. I want to see more information and discussion, but I am trying to see things in a positive light. Seventy percent of a known quantity now is probably better than 100 percent of some unknown value in the future. If our board and the member directors believe this is our best direction, I will likely follow. I have to think they have more to lose than I do if this all goes south.”
Paul Dye of Brimfield Hardware in Brimfield, Ill., commented, “In the leaked Bloomberg article True Value’s assets were valued at $800 million. If ACON buys 70 percent of True Value at $200 million and then sells all RDC’s, inventory, trailers and anything else they can for $500 million, they double their money and walk away after the bankruptcy. This would make too much sense. They are not trying to make 20, 40 million dollar dividends over three years when they could make a cool $200 million after 12 months. If there is a ‘yes’ vote we will already have our plans made here at our small store. We dropped all True Value private label a year ago besides some garden hoses. I’m glad we did now.”
Kerry Leydig of Leydig True Value in Hollidaysburg, Pa., said, “My concern is that being a smaller store I might lose the ability to fly the True Value flag. Is True Value going to put a minimum amount of yearly purchases on the non-flag flying members and if you are unable to meet this requirement the small stores will be kicked to the curb and lose their supplier? I still want to be able to purchase from True Value. I am loyal and now I wish True Value to be loyal to me.”
Brian Mushel of Justus True Value Home & Garden in Clarks Summit, Pa., said, “I belong to True Value. I get a right to vote. This is the first vote in 18 years. I get a pat dividend. I am told how much I get and in what form I get it in. I am not asked for my opinion, I am told. I get deliveries from True Value three times a week. This service, to me, is priceless. I just want to make sure I am not overlooking anything else that I may be giving up. I like the proposal. I would love to have True Value pay me to have them as my supplier.”
Doug Bowen of Ramsey True Value Hardware in Front Royal, Va., posted that his initial reaction was no. “I haven’t watched the info, nor seen anything other than this is a good thing propaganda. The skeptic in me thinks this is a railroad deal that should have been presented a few weeks ago or voted on at a normal stockholder meeting. I respect some of the board of director votes, but wonder if this is short-sided and don’t like at all losing member control of the company. Seventy percent is a serious stakeholder that could upend any norms that we know. Besides making it easier to purchase from True Value and possibly increasing smaller stores, like Emery-Waterhouse—no requirements other than a truck minimum—I don’t know that it benefits current stockholders. Looks like a lot of unbiased research is needed, but don’t like the time frame. Not sure if this is a win or colossal failure for the co-op,” Bowen said.
John Fix III of Cornell’s True Value in Eastchester, N.Y., posted, “The thing that gives me the most confidence about this deal is my past interactions with the current store owner members that serve on the True Value board. I have worked with almost all of them, either on other boards or on nominating or advisory committees. They are not only successful store owners but also knowledgeable, independent board members who take their position on the board very seriously. They are focused on the best interests of the member owners and the financial health and success of our company, and I am confident they have done due diligence in the run-up to this proposal.”
Leigh Ann Akard, third-generation owner of Akard True Value Hardware in Zionsville, Ind., said she had not yet had time to examine all the details of the deal and discuss them with her father, Steve, so she was withholding an opinion at this time. “There is a lot to think over, and I want to make sure I take enough time to think through every angle,” she said.
In a letter to members dated March 17, Hartmann said: “I normally never comment on anything the competition says. However, this is too important to stand by when misinformation is being pushed at you. What Ace has not said, of course, is that this is a bad idea. That is because they tried to do the very same thing a few years ago. It failed miserably because of a $150 million accounting error. We don’t have any accounting errors and this isn’t the merger from two decades ago either—we are RETURNING you money, NOT destroying it! And for DIB to misquote me as saying the co-op is dead, couldn’t be further from the truth. The co-op lives on with a 30 percent continuing stake to enjoy the growth and appreciation we expect to create with the simplified business model. What I absolutely did say was that a model that traps its members’ money as an illiquid asset is an outdated model.”
Ace Hardware Corp. released the following statement in response from President and CEO John Venhuizen: “We won’t speculate about True Value’s sale of a 70 percent controlling interest to private equity firm ACON. Ace remains focused on our existing retail strategy, and believes our cooperative governance structure is aligned with the goals and objectives of our growing ownership base. Ace’s financial performance and significant investments are evidence of our cooperative’s might. In the past five years alone, Ace has invested nearly $800 million in acquisitions, retail growth incentives, new store growth and capital expenditures to fuel our expanding supply chain, while delivering over $712 million in dividends. We remain aligned with the values of our shareholders and support their aspirations for growth.”
A Look Back at History
The present-day True Value Company dates back to 1948, when John Cotter founded Cotter & Company, a dealer-owned cooperative consisting of 25 independent hardware retailers. First-year sales were $385,000.
Ace Hardware Corp. dates back to 1924, but did not become a dealer co-op until 1973. Hardware Wholesalers Inc. (now Do it Best Corp.) was founded as a dealer co-op right away in 1945.
The True Value retail brand trademark was acquired when Cotter & Company acquired Hibbard, Spencer and Bartlett in 1963. Hibbard, Spencer and Bartlett had introduced True Value as a private-label line of hand tools in 1932.
In 1971 Cotter & Company began a 22-year relationship with NFL broadcaster Pat Summerall as national spokesman for True Value radio and TV commercials, which played a major part in growing the True Value retail brand. The ads typically ended with the tagline, “Tell them Pat Summerall sent you.”
When John Cotter died in 1989, Cotter & Company sales exceeded $2 billion from over 6,000 True Value Hardware stores and 2,000 V&S Variety stores. Cotter’s son, Dan Cotter, took over as CEO before retiring in 1999. Under his direction, the company launched True Value International in 1994 to serve stores outside the United States.
The beginning of True Value’s struggles date back to 1996. With Home Depot and Lowe’s continuing to capture market share in the retail hardware industry, Cotter & Company executives began discussions with ServiStar Coast to Coast, then the industry’s third-largest co-op. At the end of 1995, Cotter & Company and Ace Hardware Corp. posted nearly identical sales of $2.43 billion.
ServiStar, formerly American Hardware Supply Co. and based in Butler, Pa., had merged with hardware franchise co-op Coast to Coast Corp. in 1990 to form a $1.8 billion co-op. It entered the rental industry in 1993 by acquiring Taylor Rental Corp. ServiStar had also introduced the Home & Garden Showplace format to grow lawn and garden sales with standalone garden centers.
In April 1997, more than 95 percent of Cotter and ServiStar members approved the merger of the two co-ops. The new co-op, called TruServ, had initial sales of $4.5 billion serving 10,500 stores. Dan Cotter served as chairman and CEO, while ServiStar’s president Paul Pentz served as president and COO of TruServ for a short time before retiring.
A Merger That Flopped
The merger did not go well, exacerbated by the expense of maintaining three separate inventory tracking systems and three different store brands: True Value, ServiStar and Coast to Coast.
Don Hoye had been the CEO for less than a year when in April 2000, TruServ’s stock value collapsed when a $131 million loss was recorded for the 1999 fiscal year after a massive accounting error was discovered.
An investigation by the U.S. Securities and Exchange Commission revealed that TruServ had inadequate accounting systems and internal controls related to inventory management. In early 2001, TruServ defaulted on nearly $200 million in revolving debt, which was later refinanced. Total debt at that time exceeded $540 million.
Pamela Forbes Lieberman did an admirable job of getting things pointed in the right direction during her tenure as CEO from 2001 to late 2004. However, by the time she took over the co-op had already lost 2,100 members since the merger four years before. It was difficult to grow sales and profits in the midst of such a large member loss.
Lyle Heidemann, a former Sears executive, took over the helm the next year, around the time TruServ changed its name to True Value Company. Although the bleeding had stopped by then, momentum was hard to come by, and there were further storm clouds on the horizon.
First the recession hit in late 2007 with a resulting collapse in the housing market, then Amazon started making greater inroads into the retail industry, a trend that has since accelerated.
A New Era of Change
John Hartmann was brought in to be an agent of change, literally. The former FBI agent—he spent about 10 years at the Bureau—had most recently served nearly four years as CEO of Mitre 10, a hardware co-op in New Zealand. A law school graduate, Hartmann’s hardware industry experience also includes eight years at Home Depot and HD Supply.
Hartmann was hired as president and CEO of True Value Company in April 2013 and tasked with changing the co-op’s culture, finding what was wrong and fixing it. A decade of stagnant sales and profits had left the company in need of a jolt of energy.
True Value members, vendors and employees say that is exactly what Hartmann has provided, with a clear focus, infectious enthusiasm and innovative ideas. However, some also bemoan the fact that such a change agent wasn’t brought in a decade earlier.
“I have been a True Value store for the past 25 years and I have to say that things have been the best I’ve seen in a long time. I’m not sure the full reason for looking for a buyer,” said Donald Littlefield of Sportsman’s True Value Hardware & Rental in Westbrook, Maine.
The industry watches as True Value members ponder tough questions about their supplier’s future and their future prospects as independent retailers. What’s good for them today may not be good for them five or more years down the road if control of the company is flipped to another buyer.
One has to wonder what potential buyers could emerge for ACON’s controlling interest in the future. True Value’s primary assets are inventory and a paint plant, but the company’s retail customers would no longer be as joined at the hip with their supplier. A prospective buyer would not be assured of retaining any retail customers once a deal went down, just like the case of an independent wholesaler being purchased.
The reality is that the hardware industry needs strong wholesale companies operating on behalf of their retail customers, whether they be dealer-owned cooperatives, independent wholesalers or a hybrid.
When one of the major players stumbles, the independent two-step channel stumbles, and that is not good for the industry as a whole. Amazon is lurking, waiting for another industry to make their job easier. Let us hope True Value retailers wind up stronger, however this deal ends up.