ROANOKE, Va.—Automotive aftermarket parts distribution giant Advance Auto Parts Inc. just got bigger by leaps and bounds.
The Roanoke-based company has entered into a definitive agreement to acquire General Parts International Inc. (GPII), a privately held distributor and supplier of original equipment and aftermarket replacement products to commercial markets that operates under the Carquest and Worldpac brands.
The all-cash trans-action—which carries an enterprise value of $2.04 billion—has been approved by the boards of directors of both companies.
The deal creates the largest automotive aftermarket parts provider in North America with combined annual sales of more than $9.2 billion and more than 70,000 employees.
Advance said "the strong combined financial profile allows for an all-cash transaction and supports Advance's commitment to maintain its investment grade rating. The acquisition of GPII will accelerate Advance's growth strategy and enhance shareholder value...."
And with the ink not yet dry on the mega-deal, an analyst for Frost & Sullivan expects more merger and acquisition (M&A) activity to occur.
Stephen Spivey, aftermarket program manager for market research firm Frost & Sullivan Inc., said Advance Auto's acquisition of GPII and its Carquest distribution chain "dramatically accelerates a trend of consolidation in the automotive parts aftermarket."
Carquest is the fifth-largest parts distributor in North America, according to Mr. Spivey, "and the acquisition now makes Advance Auto the largest participant in this market—both in terms of store locations and revenue."
He said the buyout "also dramatically enhances the role of retailers in the aftermarket.
With a two-step distribution structure that includes overseas purchasing teams, companies such as Advance, AutoZone and O'Reilly Automotive have taken market share away from traditional wholesale distribution groups, such as Carquest."
The result, Mr. Spivey said, will be "a continuing spiral of acquisitions of independent warehouse distributors by larger market participants to remain competitive."
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.
Darren Jackson, Advance's CEO, said O. Temple Sloan III, president of GPII, will continue as president of that firm while reporting to Mr. 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."
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 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.
The acquisition, subject to regulatory approvals and customary closing conditions, is expected to close by late 2013 or early 2014.
Advance reported sales for the third quarter increased 4.3 percent to $1.52 billion, driven by the company's acquisition of B.W.P. Distributors Inc. and the addition of 170 new 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, compared with total sales of $4.88 billion over the same period last year.
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 (EPS) 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.