Big deal: A Q&A with the Do it Best CEO
Dan Starr, the CEO of Do it Best, entered the co-op’s ranks through the legal department in 2005 when he was hired as general counsel.
That experience should serve him well as he navigates through reams of legal documents that apply to Do it Best’s plan to play the role of stalking horse in its acquisition of the assets of True Value Company, which filed for bankruptcy protection this week.
In this edited interview with HBSDealer, Starr shared his insights on the deal and what it could mean to retailers, vendors and Do it Best nation.
HBSDealer: What is it exactly that Do it Best looks to gain and acquire in this deal?
Dan Starr: If our bid is successful, we’d certainly be buying the inventory that they have, and the customer relationships. Also, there’s the stable of brand names and trade names — EasyCare paint and Master Mechanic tools are examples. So, those are the critical assets, and we are also interested in their distribution centers. We’re already engaged in trying to optimize our own distribution network. So there's a lot of additional work that has to take place before we figure it out. But I do think we’re going to need their distribution centers.
HBSDealer: True Value Company’s structure is complicated — 70 percent was purchased in 2018 by ACON Investments, and 30 percent was left in ownership of the co-op. What can you share about the impact of this deal on that 30 percent?
Dan Starr: Here are my thoughts, and I'm going to draw from the actual True Value filing, because it kind of lays out the picture. They said that they have assets that range anywhere from a hundred to five hundred million in value. And they also said they have debts, liabilities etc. that run from $500 million to $1 billion. So, I'm not sure that paints a good story for any shareholder—whether that's ACON, or this 30 percent group, or whoever.
I have no idea how that ultimately will be resolved by the courts. But first and foremost, they're going to have to try to satisfy creditor claims before they ever get to shareholders. And it’s concerning. You’ve got secured creditors, you've got unsecured creditors, you've got a majority shareholder, and then you've got a minority shareholder group—and there's just not enough in what they’re claiming to go around. So I think there's going to be difficult decisions for the court system.
HBSDealer: Can you describe in layman’s terms what is a stalking-horse bidder?
Dan Starr: When a typical bankruptcy petition is filed, it puts a hold on creditors so that the business can continue to operate in a sort of protected state, while it tries to maximize the expected recovery for a pool of creditors and to do it in a fair way and in a way that's administered by a trustee in the bankruptcy setting. And that's sort of the traditional bankruptcy.
This one is known as a prepackaged bankruptcy. It includes a fully negotiated asset purchase agreement where they designate us as the preferred buyer of these assets, and we come to the table not just with a bankruptcy filing, but a solution in mind to how that could be resolved.
This is where we get into the “stalking horse” terminology. We are out there as a primary bidder as the preferred buyer as the lead and we are in that sense a stalking horse, but others can come into the process and they would have to outbid us and provide better terms, but that is an opportunity that's available for a window of time.
HBSDealer: At your market in Indianapolis, there were a large number of prospects. I suspect True Value dealers were among them. How would you describe your activity with True Value dealers since True Value sold to private equity in 2018?
Dan Starr: Since then, we've done a lot of conversions of True Value members. I would say they represent probably the largest category of member conversions.
And I think that there are reasons why they're motivated to make a change, but they also are very loyal. People struggle with that decision because it's an emotional one. Even if they’re frustrated with the current True Value situation, they're still mindful of the company that it used to be and are very loyal to it. So it can be a very difficult decision for some of those folks.
HBSDealer: Would existing True Value customers be encouraged or required to join the Do it Best co-op? Or could they continue on their own as customers of Do it Best (as opposed to members)?
Dan Starr: Let's say the deal is consummated on the day of closing. Then what happens next? I think that we plan to continue to operate True Value as it has historically operated, serving a customer group. Then we have to map out a path where we bring all those ends together. It just doesn't make a whole lot of sense to run two different companies. We would need to merge those operations together over time.
By the way, we already do business with some customers who aren't co-op members. So it's not completely unheard of that we might be able to continue to serve folks in a customer relationship, who prefer to be served that way.
But we are a co-op, and I think that our go-to-market strategy would be for a lot of those retailers to join the co-op.
That doesn't mean that they would stop using the True Value name. We would have a well-designed retail plan for folks who want to draw on that, and a path for folks to opt into that after the close.
HBSDealer: So you’re not seeing a significant change in your structure.
Dan Starr: We’re not going to change who we are, not at all. We are a co-op and we believe in the co-op model and I'll preach the benefits of that all day long. But we’re not going to coerce them into any particular approach. If they want to be served as a customer [as opposed to a member], we can satisfy that need.
HBSDealer What is in store for the True Value brand?
Dan Starr: We look at that as one of the critical assets that’s part of our proposed acquisition plan. And we wouldn't do that just to turn around and destroy it or shelve it. I think “True Value” still has a tremendous amount, forgive the pun, of value. And I think we want to see it preserved, but not just preserved—we want to see it enhanced. And that's our goal.
HBSDealer: How does this plan for an acquisition compare to the merger/acquisition of United Hardware and its Hardware Hank banner?
Dan Starr: There are more differences than similarities. Starting at size and scale, the operations of United were regional. They had one distribution center in the upper Midwest, and they served a radius around that center. And the total volume was probably something like $130 million.
With True Value, on the other hand, it’s 12 distribution centers serving close to 4,500 customers doing about $1.5 billion. So that’s a big difference.
The other difference is the nature of the transaction. With the United merger, we took their co-op shares and in exchange, gave them shares in Do it Best. Effectively, we took on not just the assets, but also the legacy liabilities, bank financing, defined contribution plan, the health care plan, etc. We took those from United and carried those forward. We kind of stepped into their shoes, if you will.
With True Value, that's just not the case. We would be acquiring all of their assets and only assuming a small portion of their liabilities in order to try to continue their business operations. We are not stepping into their shoes.
HBSDealer: For existing True Value dealers and True Value vendors who are reading, what have you to say to them?
Dan Starr: The message to those True Value customers is really one in the same with the message to our members: We’re here to support and serve independents. That’s our true north. And for all those True Value independent dealers, we want to welcome them to join the family. And we anticipate working just as hard for each group as we possibly can.
We also have a servant-led model as it applies to our vendor community. We want long-term sustainable relationships with our vendors. And if our bid is approved, we're going to try to engage with that group and figure out ways that they can get some of that recovery—at least claims for goods provided within 20 days prior to the filing. Otherwise, I think they would get nothing.
And for folks who have a vendor relationship with Do it Best, I think we provide the best opportunity out of that bankruptcy to work with them on a go-forward basis.
HBSDealer: And to Do it Best members?
Dan Starr: What I would say to the Do it Best members is that this is a generational opportunity. Part of that is the brand and part of that is the scale that can translate to greater efficiencies. And for a company that does wholesale distribution and runs a lot of miles over land to deliver product, scale matters. It matters in terms of increased efficiency of operations and increased productivity and greater return on investment.
So I would say to them as retailers that they can count on us to continue to provide the support that they need in order to do their job and run a successful business.
And, additionally, there is a slightly different message to them as shareholders. To them I would say that this is a very wise deployment of capital that will have one of the best returns that you could hope for in terms of the long-term value proposition of what this can deliver to our membership.
