Shares of Genuine Parts Company (GPC) rose some 1.5% in Monday's trading session. The company which is focused on the distribution of automotive, industrial and electronic materials and parts, announced that it has acquired a 70% remaining stake in Exego Group.
Genuine Parts Company announced that it has agreed to acquire the remaining 70% stake in Exego Group, headquartered in Australia. Genuine Parts will pay roughly $800 million for the remainder of the company, including the assumption of debt.
The company already purchased the first 30% stake in January of 2012 and has now lifted the option to acquire the remainder of the shares. Exego is a leading distributor of automotive replacement parts and accessories in Australia and New Zealand, operating more than 430 stores with more than 4,000 staff.
CEO and Chairman Tom Gallagher commented on the deal, "We are very pleased to enter the final phase of our Exego Group acquisition. The Exego team exceeded our expectations for meeting the growth and earnings thresholds outlined in our original agreement, thus, we were presented with the opportunity to move forward with our investment earlier than expected."
Exego Group generated annual revenues of more than $1 billion. As such the total deal values Exego at approximately 1.1 times annual revenues. The company expects that the deal will be an accretive business investment which will benefit shareholders in the future. The deal will be financed with cash at hand and new borrowings.
The deal is subject to common closing conditions including regulatory approval. Genuine Parts expects to close the deal on April 1, 2013.
Some three weeks ago, Genuine Parts Company reported its full year results for 2012. The company generated full year sales of $13.0 billion on which the company net earned $648 million, or $4.14 per diluted share.
The company operates with $403.1 million in cash and equivalents and $500 million in short and long term debt, for a modest net debt position.
The market currently values Genuine Parts Company around $11.6 billion. This values the firm at approximately 0.9 times annual revenues and 17-18 times annual earnings.
Genuine Parts Company currently pays a quarterly dividend of $0.54 per share, for an annual dividend yield of 2.9%.
Some Historical Perspective
Shares of Genuine Parts Company have finally seen some upside recently after shares have consolidated in a tight $60-$65 trading range in 2012. Shares have already returned some 18% so far in 2013, trading at fresh all-time highs.
Shares of the company roughly halved from $50 in 2007 to lows of $25 in 2009, but have tripled from that point in time. Between 2009 and 2012, the company has grown its annual revenues by approximately 30% to $13.0 billion. Net income rose more than 60% to $648 million over the same time period.
So how does the valuation of Genuine Parts Company compare to some of its major competitors in the automotive market? Three other major competitors operate in the used car and car parts market.
AutoNation (AN), the automotive retailer which furthermore offers repair and maintenance services, is currently valued at roughly $5.4 billion, excluding a net debt position of $1.8 billion. This values the firm at 0.4 times annual revenues and 17-18 times annual earnings, according to its latest annual release.
AutoZone (AZO), another major competitor focused on automotive replacement parts and accessories, is currently valued at $14.1 billion, excluding $3.8 billion in net debt. This values the firm at 1.6 times annual revenues and 15-16 times annual earnings.
CarMax (KMX), which is a wholesaler of used vehicles, is valued at $9.4 billion, excluding $5.2 billion in net debt. This values the firm at roughly 0.9 times annual revenues and 22-23 times annual earnings.
As such, the overall valuation of Genuine Parts is in line with some of its major competitors, notably that of AutoZone which comes closest in terms of related activities.
Shareholders of Genuine Parts Company applaud the acquisition of the remainder of the stake in Exego Group. By consolidating the operations, Genuine Parts will grow its annual revenues by approximately 8% towards $14 billion.
The company has announced that the deal will be accretive to earnings, so a profit contribution of $50 million seems reasonably conservative, resulting in pro-forma profits of approximately $700 million. As a result of the deal, pro-forma operations will be valued at approximately 0.8 times annual revenues and 16-17 times annual earnings.
Overall, the deal looks attractive for Genuine Parts' shareholders. Merely 14 months ago, the company paid $150 million for a 30% stake in Exego, and the company has been so pleased with its performance that it has paid another $800 million for the remainder 70% stake. The $800 million deal includes the assumption of debt, which has not been specified.
The deal multiples are in line with Genuine's own valuation, and seem reasonable. Overall, investors are very pleased with the company which in 2012 announced its 57th consecutive year of dividend hikes, currently paying out a decent 2.9% dividend yield. Besides paying out generous dividends, the company is also returning cash by repurchasing shares, with another 12.2 million shares being authorized for repurchases today.
Overall the valuation seems a little high, but justifiable given the healthy financial position, growing underlying operations and a strong history of returning cash and value to shareholders. The valuation at 16-17 times annual earnings is a little ambitious, yet the 2.9% dividend yield provides investors with a comfortable margin of safety.