Diploma PLC & Value-Added Distribution

Diploma is a UK-listed value-added distributor of industrial seals, controls, and life sciences products. The company has compounded FCF at ~16% per year for the last 20 years and is one of the best-performing listed businesses in the UK.

DPLM Investor Presentation 2023
DPLM Investor Presentation 2023

This performance was pioneered and led by Bruce Thompson who took over and restructured the group in 1998. He designed the accretive M&A philosophy of buying mission critical products in niche markets.

DPLM Investor Pres 2023
DPLM Investor Pres 2023

We interviewed a Director who worked closely with Bruce at HQ in acquiring companies across all segments over the last decade.

DPLM acquires niche distributors at ~6x EBIT and lets them run autonomously. Diploma's distribution businesses are not cyclical, each company sells 'essential' products:

The overall philosophy in all my time at Diploma was around this value-added distribution model. They were all essential products; everything that was sold was always needed. Whenever you get macro-economic fluctuations, the cyclical nature of economies, these products are always needed regardless. That was the model. It was essential products and services. Then the value-add piece differentiates Diploma from just buying and selling product as a distributor. - Former Director at Diploma PLC

In 2019, Thompson retired and a new CEO took over. The M&A philosophy has slightly changed as DPLM has slightly levered the balance sheet, recently issued equity, and is paying up for larger companies. This has been successful so far as Windy City, DPLM’s largest acquisition, has doubled EBIT in the last few years. We explore the potential risks with DPLM's new M&A strategy:

I think it’s clear, the problem is as the company gets bigger, the harder it becomes to move the dial. As the numbers of revenue get bigger, doing smaller deals doesn't make much difference in percentage terms. You have to start going bigger to do that, and I think it's clear that the current management wishes to accelerate that program of acquisitions and build a bigger group, which is the right thing to do. But what comes with that is larger, more transformational deals come with more risk. If it goes great, that's fine, brilliant. If it doesn't, it's far more exposed, particularly when it's funded with debt. - Former Director at Diploma PLC

We believe DPLM is one of the highest quality businesses in the UK and is worth exploring for anyone who understands Fastenal, Addtech / B&B, POOL, WSO, and other value-added distributors.

We will be following the new M&A strategy closely. We’re fairly skeptical of such strategic changes to M&A-led companies when it gets to scale. The risk-reward is often lower given the multiple arbitrage declines and the room for error decreases. It will be interesting to see how this plays out.

Becle: Tequila Agave Pricing, Supply & Demand Dynamics

Becle owns the world's most popular tequila brand, Jose Cuervo. The recent growth in tequila demand has caused a rise in agave prices. In this interview, an experienced agave buyer walks through the state of the market and interprets the most recent report put out by the CRT, the tequila regulator:

Many people thought, in 2020, the price was going to start to decrease but, due to the increase of consumption in the US and, also, the trend for the añejo, extra añejo, the companies started to use the product they have in tanks. They had to produce more liquid, to age. Two years ago, there was no añejo, extra añejo available on the market. I saw a lot of companies and I helped some companies to find some añejos. Most of the companies saw that and started to buy bourbon barrels to age and started to produce more blanco to age. I didn’t see the agave drop in the past years, because the production has stayed the same, or increased, in order to be able to age product.

The growth in the category, particularly the premium segment, has led to demand for agave to age the liquid.

From 2015 to 2022, Becle has seen its sales per case grow from $51 to $86 but its gross margin declined from 54.9% to 52.1%.


The cost of agave has been the core driver of gross margin compression but may also drive margin expansion as supply and demand rebalance.

Tequila Matchmaker
Tequila Matchmaker

Becle started producing their own agave to have more price control over their supply:

I think there is enough growth from other brands to avoid the price dropping dramatically. I don’t think Cuervo will make the switch suddenly. They will start using their own agave but keep some of the business with the bulk suppliers and with other agave farmers. I have also seen companies that are investing in tanks so they can produce and keep the liquid in tanks, or even barrels. We have seen that grow in several brands, like Casamigos, Teremana, Ocho, most of those brands. Several of the brands are growing more in aging tequila as opposed to the tequila that isn’t aged. That applies to the luxury brands, as well. I think we will see more luxury brands over the next few years, using añejos and cristalinos tequila, more than blancos and reposados. The same as happened with Patrón several years ago. It was one of the main premium brands and then more brands started to follow them.

If Becle were able to restore its Gross Margins to 60%, this would equate to a 2.3B pesos in incremental operating income, or a 26% increase compared to 8.9B pesos in operating income for FY22. The question is how long this may take.

Credit Acceptance vs Westlake Loan Economics

This interview is with a Sales Director who has over 25 years experience in subprime auto lending with a decade at Credit Acceptance, 5 years at Westlake, and a decade at smaller competitors and on the dealer side.

We walk through how CACC prices loans vs Westlake and how the two compete.

[Westlake] has a system called DealerCenter which calculates the fees automatically. They are between 6% and 15%, on average, depending on the customer's credit, job or income. It also takes into consideration the quality of the vehicle with a vehicle score which goes into it. They look at the consumer's credit and fraud point score to make an informed decision and provide the dealer with a deal that has as small a fee as possible, while still making sense for them, versus Credit Acceptance who want to make 19% ROI. Westlake's expectation is 10%, so they have a different expectation in terms of how much money they want to make per deal. Westlake looks for smaller margins but higher volumes, versus CACC who never compromise. - Former Sales Director at Credit Acceptance

Röko M&A Strategy, Transaction Structure, & Returns

Röko is Fredrik Karlsson’s new serial acquisition machine. From 1998 to 2019, Fredrik increased shareholder value by over 100x at Lifco, one of Sweden’s most successful companies. Since February 2019, he has scaled Röko to 100m in EBITA.

This is an interview with the CFO and Deputy CEO exploring the M&A strategy and typical transaction structures.

Röko has refined its M&A criteria based on 20-years of learnings from Lifco:

Röko FY22 Presentation
Röko FY22 Presentation

There are two slightly different characteristics of Röko relative to Lifco and other serial acquirers: it’s truly sector agnostic and it typically only acquires ~70% with a 10-year put-call option for the remaining 30%.

This opens up the market to founders who don’t wish to sell 100%. It also gives Röko ~5-10 years to find a successor if the seller wishes to retire as the option expires. This seems a much more effective way to run succession plans than with a typical 1-year earn out which encourages sellers to take a short-term mindset.

The put call option works in the following way. At day one after the acquisition, it is valued equal to what the management team invested for that put call, or retained as a share in the transaction. Going forward, the put call for each respective company, we have a model where we apply a multiple to the average earnings that that company has had – normally the three-year average for each company – and we apply a multiple to that, and then multiply that with whatever minority share that is retained by the entrepreneur or management team. - CFO of Roko

If this structure retains more founders for longer, it could suggest Röko can successfully acquire across all sectors, B2B and B2C given it has an aligned founder. It could also mean Röko can scale faster given it has a wider net to choose targets from. This is certainly what Röko seems to think.

We will also be publishing an interview with Frederik shortly. This one is certainly one to watch out for.

Tesla Energy, SolarCity Acquisition, Strategy & Integration

There are two interviews exploring Tesla’s procurement strategy and the history and value of Solar City, now Tesla Energy.

One interesting insight is how Tesla is positioned in battery technology:

On the car side, the car manufacturers couldn't believe it for the longest time. On the battery side, people have been warned. I don’t think Tesla is ahead at all. I think the Chinese are ahead…it’s CATL mostly. CATL will work hard to get the cost down. I don't think Tesla can beat CATL. But there needs to be more than two companies; how LG and Panasonic will do it, I’m not so sure. They might not be able to keep up with the development curve. - Former Lead Engineer at Solar City and Tesla Energy

And how Elon may be wrong on solar:

On Tesla, Elon has a fantastic track record, but he’s not always right. I think he’s wrong on solar. He wanted to make solar gigantic, then he lost interest. Now solar is a little niche product he doesn’t care about. In terms of the energy storage side, Elon is correct that there is a need, but whether Tesla will fulfill that need, I’m not sure. If he can’t figure it out, he might just lose interest and then move on to something else. - Former Lead Engineer at Solar City and Tesla Energy

OneWater Marine: TH Marine Acquisition, Marine Parts & Accessories

With doubts about boat sales volumes after a boost from the pandemic, OneWater Marine proceeded to acquire TH Marine in 2021, its largest acquisition ever.

This interview with a former President at TH Marine provides an insight into the marine parts & accessories business and the potential benefits of ONEW owning more or the value chain:

I would say, there is going to be a wave in the next three to five years, where all these new boats have been out in the wild for several years. They have probably changed ownership once or twice. They are still really good boats; things are built longer and better. It’s like cars. A 2015 car is still really darned good. I think, if you have the right builders, these things are built better than they were 10 years ago, so they are going to be around longer. That means there will be a need for parts and components; the accessories, the electronics, the lighting, the stainless steel things that you can use to dress up these old boats, to make them feel new to the new owners. You are going to see more volume of parts and accessories. - Former President at TH Marine