Is GWW's Internet business worth $16 per share. This article was published in the November 29, 1999 issue of Chicago Crain's:
Old-line company tangles with Net
Grainger's dilemma: Float stock in online venture?
By Steve Daniels
W.W. Grainger Inc. has built an Internet business reputed to be one of the country's most effective online business-to-business operations.
But shareholders of the Lake Forest-based distributor of industrial supplies wouldn't know that, judging by Grainger's stagnant stock price.
In a year's time, the stock has barely budged. Its sitting at around $44, exactly its trading price a year ago. Meanwhile, its 3-year-old Internet business has exploded to $160 million from $14 million last year.
Now, the $4.3-billion company is mulling whether to spin off or otherwise create a separate stock for its Internet business, a move to gain market recognition of its value at a time of stratospheric public valuations for dot.com companies.
A separate, publicly trade Grainger Internet stock would give managers a valuable tool to lure and keep coveted technical specialists, who view stock options as a critical part of their compensation.
It's a strategy that numerous brick-and-mortar companies such as office supplies retailer Staples Inc. and bookseller Barnes & Noble Inc. have employed as their Internet subsidiaries have developed.
But Grainger executives worry that spinning off the Internet business--one of the best-developed in the business-to-business world--could undermine its synergy with Grainger's core business.
It could also turn Grainger's 72-year-old franchise--and its stock--into a slow-growth story for growth-oriented investors.
Grainger distributes more than 81,000 industrial items--necessities such as air compressors, electric motors, paint-spraying equipment and cleaning supplies--through its branches and general catalog. It competes in a fragmented marketplace with tens of thousands of specialized distributors.
The company operates three Internet businesses: Grainger.com, which enables customers to buy the same products found in it catalog over the Web; Order-Zone.com, which enables customers to order supplies from Grainger and several outside distributors over the Web, reducing their order-processing costs, and FindMRO.com--launched a few weeks ago out of Grainger's Niles office--that helps customers locate hard-to-find products.
"Our response (to the spinoff issue) has been to be extremely knowledgeable (about our options) from a shareholder perspective and employee presepctive," says Donald E. Bielinski, group president overseeing Grainger's online strategy. "To make a move without thinking it through very thoroughly is a mistake. Right now, the power of the integration (between the Internet and traditional business) is very important."
The company's options include an outright spinoff of the Internet operation, with Grainger either offering 100% of the unit or keeping a stake. Another possibility is issuing a "tracking stock" designed to mirror the performance of the business but that, unlike ordinary stock, would not give shareholders ownership rights to the Internet company's assets.
Finally, Grainger could create a "phantom stock," offered only to employees, that would be internally valued rather than traded on an exchange.
A spinoff might not even be under consideration by Grainger's relatively conversative management were it not for the lofty valuations Internet companies are attracting.
One analyst for a big Grainger shareholder reckons the company's Internet business could command a public multiple of five times sales, which, at an estimated $300 million next year, would translate into $16 a share--more than a third of the entire company' stock price. That's for a business that this year will account for less than 4% of Grainger's total sales.
A spinoff "would really highlight how cheap you're getting the rest of the business, if they could pull it off," says Brent Jesko, analyst with Menomonee Falls, Wis. base Strong Capital Management, which holds about 1% of Grainger's stock. "It's something they should definitely pursue and look int."
Anothe argument for a spinoff is the need for a pure-play Internet stock to offer options to potential employees with technology experience.
"It's becoming expected that an Internet stock be there (as part of a compensation package)," says David. M. Tolmie, president and CEO of Yesmail.com, a Vernon Hills-based Internet marketing firm. "It's certainly true in Silicon Valley. It's becoming true in Chicago."
Grainger's Mr. Bielinski says attracting worker--the online units employ 200 of Grainger's 12,000-person workforce--hasn't been a problem.
"We have been extremely happy with our ability to attract and retain people in the Internet space," he says.
While the benefits of a spinoff are apparent, there are pitfalls as well, such as the accounting complexities of dividing revenues between the parent and the Internet subsidiary.
More important, splitting Grainger Internet Commerce from the parent might make cooperation between the two more difficult.
"I hope they don't (do a spinoff)," says Thomaas Mahowald, an analyst with Minneapolis-based Amercian Express Financial Advisors, which holds 1.4% of Grainger's stock. "The value of Grainger is enhanced with having the Internet strategy embedded within it." |
