The acquisition, according to Advance, will provide the following strategic benefits:
• Creates a market leader — The No. 1 automotive aftermarket parts provider in North America, with a balanced platform for growth between do-it-yourself (DIY) and commercial sectors along with distribution of import automotive parts and the largest automotive aftermarket business-to-business e-commerce platform in North America.
• Delivers scale — Provides Advance with complete coast-to-coast coverage across North America, "creating a company with scale, reach and expanded growth opportunities benefiting shareholders, customers and team members. This presence in new markets allows Advance the ability to expand its geographic footprint in an efficient manner."
• Accelerates complementary market opportunities — Expands Advance's product and category offerings in both core and new product lines, such as paint and heavy duty, creates a new sales channel with independent customers and broadens the ability to grow with attractive customer segments such as larger bay garages, import specialists, national accounts and fleet and government programs.
• Strengthens leading brands and capabilities — Enhances Advance's ability to serve customers through the transfer of Carquest's commercial capabilities and employees' parts knowledge into Advance stores while expanding DIY into select company operated Carquest stores. The combination expands key capabilities in customer service through enhanced daily replenishment and customer loyalty programs to a larger truck fleet and a significantly expanded commercial sales team.
O. Temple Sloan III, president of GPII, will continue as president of GPII, reporting to Advance CEO Darren Jackson, and is expected to join the Advance board of directors. The combined company will be based in Roanoke and will continue to maintain a presence in GPII's Raleigh, N.C., base of operations.
Mr. Jackson called the deal a "transformational transaction" that provides a "compelling strategic opportunity for Advance to expand our geographic presence and commercial capabilities to better serve customers.
"The addition of 1,246 company-operated stores and 1,418 independently owned Carquest locations provides us with an immediate platform and scale across North America, full market coverage and the opportunity to position ourselves as the market leader in the commercial business."
He added that Advance believes "the combination of the two companies is a great fit and the synergy of GPII's assets with our capabilities will allow us to capitalize on market opportunities that will create value for our shareholders and provide even better service to our customers. We welcome and look forward to working with the talented leaders and team members from GPII."
Mr. Sloan said GPII is "excited to bring together two highly complementary automotive aftermarket companies. The combination with Advance Auto Parts is the next logical step in our company's evolution.
"Advance's retail presence, strong capability infrastructure and acquisition integration experience combined with GPII's leadership in the commercial, independent and import segments creates a powerful platform to drive profitable growth. With a more robust offering and a shared focus on best-in-class customer service, our combined business will continue to deliver value for customers and shareholders."
Financial benefits
Advance said it anticipates the transaction will result in approximately $160 million of annual run-rate synergies to be fully realized within three years after closing the deal. The transaction also is expected to generate considerable free cash flow and deliver significant estimated fiscal year 2014 cash EPS accretion of more than 20 percent excluding one-time costs to achieve synergies and a percentage increase in the low teens including one-time costs to achieve synergies.
According to the company, it intends to finance the acquisition through a combination of senior notes, bank debt and existing cash on hand. Following the transaction, Advance "expects to continue to have a solid balance sheet supported by the strong cash flow of the combined business." In connection with the transaction, Advance has received a financing commitment from JPMorgan Chase Bank, N.A., with the senior notes offering and bank debt syndication expected to occur prior to closing.
Mike Norona, Advance's chief financial officer, said the "strategic transaction presents an exciting opportunity for value creation and Advance is dedicated to delivering on the compelling financial potential this combination creates while remaining committed to maintaining our investment grade credit rating."
The acquisition, subject to regulatory approvals and customary closing conditions, is expected to close by late 2013 or early 2014.
Advisers
Financial advisers to Advance are Blackstone Advisory Partners L.P. and J.P. Morgan Securities L.L.C. The firm's legal adviser is Kirkland & Ellis L.L.P. Financial advisers to GPII are Wells Fargo Securities L.L.C. and Orr Group L.L.C. Its legal advisers are Manning Fulton & Skinner P.A. and Smith, Anderson, Blount, Dorsett, Mitchell & Jernigan L.L.P.
Preliminary third quarter results
Advance previously announced that it will release its third quarter earnings on Oct. 31, but in connection with the transaction announcement, the company is releasing the following preliminary information, which remains subject to change as the quarterly information is finalized:
Sales for the third quarter increased 4.3 percent to $1.52 billion, driven by its acquisition of B.W.P. Distributors Inc. and the net addition of 170 stores over the past 12 months. Those numbers were partially offset by a comparable store sales decrease of 2 percent vs. a comparable store sales decrease of 1.8 percent during the third quarter of fiscal 2012.
Year-to-date, Advance's total sales increased 4.3 percent to $5.09 billion.
Advance said its operating income during the third quarter is expected to be $170.7 million — which was a 13.5-percent increase vs. the third quarter last year. Third quarter earnings per diluted share are expected to be $1.42, which was a 17.4-percent increase vs. last year's third quarter.
As of Oct. 5, the company operated 4,018 stores in 39 states, Puerto Rico and the Virgin Islands.
Raleigh-based GPII was founded in 1962 by Chairman O. Temple Sloan Jr. It distributes and retails replacement parts, supplies, tools and equipment for automobiles, light and heavy trucks, off-road equipment, buses, recreational equipment and agricultural equipment.
The company operates the Carquest auto parts distribution network, with 38 distribution centers, 1,246 company operated stores across the U.S. and Canada, and 1,418 independently owned Carquest locations primarily in the US and Canada.
It also operates Worldpac, an importer and distributor of original equipment and quality aftermarket replacement automotive parts to import specialists in North America and Puerto Rico. That unit operates four main distribution centers and 102 facilities across the U.S. and Canada.
