Tire retailer M&A surge fueled by private equity

AKRON — Mergers and acquisitions have been part and parcel of the retail tire/auto repair industry for decades, but the pace and scale of consolidation have ramped up considerably the past several years as the private-capital industry "discovered" the automotive aftermarket.

The trend likely will continue — perhaps even accelerate — because market conditions are right and a growing private-equity industry is searching for industry sectors with promising returns, according to information gleaned from a number of conversations with individuals familiar with the situation.

In 2021, Tire Business tracked 40-plus transactions in the retail tire distribution and auto repair sector comprising 420 points of sale. In the first five months of 2022, there were 20 transactions covering 89 points of sale.

The emergence of private equity as a legitimate factor in the M&A market began nearly a decade ago, in 2014, when Canada's Onex Capital Group took a minority share interest in Mavis Discount Tire. That led less than a year later to Mavis' acquisition of Somerset Tire, which at that time was one of the larger transactions ever tracked in the sector.

Since then, the private-equity partner backing Mavis changed twice more, first in 2018 to Golden Gate Capital of San Francisco and more recently in March 2021 to investors led by BayPine L.P. of Boston.

The current investor group includes TSG Consumer Partners LP (TSG), as well as West First Management (WFM), a holding company controlled by David and Stephen Sorbaro, co-CEOs of Millwood, N.Y.-based Mavis.

Backed by these private capital entities, Mavis has grown exponentially over the past few years to become one of the three or four largest independent tire retail businesses in North America, with more than 1,000 points of sale under its direct control and hundreds more operating under its Tuffy Tire and Express Oil/Tire Engineers franchise arms.

In the same time frame, three or four other dealership groups organized or backed by private equity have grown rapidly and now are among the dozen largest tire retailers in North America.

Among these are Sun Auto Tire & Service and Big Brand Tire, backed by Leonard Green & Partners and Percheron Investments, respectively. Both groups are pursuing aggressive "buy, build and expand" strategies.

A third worth noting is Meritage Group L.P., which bought control of Les Schwab Tire in early 2021, but to date has ventured only once since into the acquisition arena, buying Plains Tire Co., a nine-store Casper, Wyo.-based dealership.

So why has the tire distribution/auto repair sector become a hot commodity for private equity?

There appears to be two fundamental reasons, according to a pair of business advisers contacted by Tire Business: a growing number of private equity firms looking for investment opportunities and the relatively solid financial footing seen in the automotive aftermarket.

According to Wood Britton, a principal with Front-Ridge Advisors L.L.C., it's the "sheer number of private-equity groups and money available" that's driving a lot of this trend.

"You find really sharp people looking for good return," he said. "The tire retail sector has efficiencies to be gained, especially by consolidating them into larger groups."

In a relatively mature industry like this, he said, "you can't get the growth you need through existing footprint or growing organically that you can by acquiring."

Steven Rathbone, managing director of Stout Risius Ross L.L.C.'s investment banking group, suggested five reasons for private equity's growing interest in the automotive aftermarket.

    1. Fragmentation. Rathbone described the sector as "incredibly fragmented" and "ripe for consolidation by larger players" looking to build geographic coverage and scale. This leads to significant purchasing power and back-office synergies.

    2. Tires and service/repair are "very much non-discretionary," Rathbone said. "People drive, and they need tires and service. They can't afford to be off the road in most cases. It's a repair and repeat purchase. Build brand loyalty and people will come back. They can't drive without tires."

And consider annual service that's tied to state inspections, he added.

     3. Retail is a "strong margin business with a good cash-flow profile." Margins are quite healthy, especially on service, oftentimes 50% or 60%, he said. Combining that with a larger network purchasing — more units, getting better terms, better rebates — has a compounding effect. Overall, margins are quite good.

Many dealers also operate on a negative net working capital basis and are very good cash-flow machines, Rathbone noted.

"If you think about it, customers come in and pay you immediately. Credit card, cash or check. ... Unlike the wholesale commercial B2B with receivables, retailers carry very low receivable balance, exercise just-in-time or inventory purchasing habits and strategies that keep them light on that."

    4. Accretion. The ability for larger retail players to acquire smaller networks, those with mid- to upper-high single EBITDA multiples, and then achieve an exit on what could be a significantly larger consolidated platform in the low to mid-teen EBITDA multiples.

    5. Exit strategy. "You don't want to get into something you can't exit," Rathbone noted. "We've seen Mavis trade three times … continuing to trade up the private equity chain as they get larger," he said, adding that as the firm gets to scale, there's the option to go public. There also are logical, strategic buyers in the industry looking for meaningful-sized acquisitions to move the needle. All in all, good exit opportunities.

Private-equity investors are by nature opportunistic, he noted, meaning most firms look at an ownership window of at least two to three years and up to seven years before triggering their exit strategy. Ultimately market forces, excessive acquisitions and other factors will force that.

Looking at the M&A scene from the perspective of a potential seller, FrontRidge's Britton suggested private-equity-backed entities can offer advantages such as enhanced efficiencies, either through better back-office business platforms or by spreading fixed costs over a larger store network.

"They have the capital to invest in equipment that older, more established chains may not have made …" he said, which can improve margins over a relatively short time.

At the same time, Britton urged those considering this route to carry out due diligence on the prospective buyer. How do businesses they've acquired perform post sale?

As for things to look at if one's considering selling, Britton suggested a number of items including:

• Undertake an annual review of the business' valuation, realistic expectations, etc. Take into account what the business might be worth in three to five years if growing at the current pace;
• Continue to make improvements on a regular basis;
• Ensure the business has solid business reporting, including a clear definition of what's considered corporate and what's more personal to the owners;
• Keep the management fresh;
• Consult with a reputable wealth manager and plan out what the scenario looks like post sale.

Britton also urged business owners considering selling to not wait too long. Market conditions can change quickly — consider the Great Recession — forcing owners to postpone their exit strategy indefinitely or accept a lower-than-expected valuation.