Shares of Advance Auto Parts (AAP) saw a big jump after the specialty automotive aftermarket parts retailer announced the acquisition of GPII, making it the largest automotive aftermarket provider in North America.
While I think management has made a great deal, Wednesday's trading action already reflects a great deal of the expected accretion and expected purchase price.
I remain on the sidelines, but applaud management and shareholders with an excellent deal.
Advance Auto Parts announced that it has agreed to acquire General Parts International in an attempt to create the largest automotive aftermarket parts provider in North America.
Advance Auto Parts will pay a total of $2.04 billion for the leading privately held distributor of original equipment and aftermarket replacement products. GPII operates under the CARQUEST and WOLRDPAC brand.
Once combined, Advance Auto parts will be the leader in automotive aftermarket parts with over 70,000 team members. The business is balanced, having do-it-yourself, commercial and e-commerce business-to-business operations.
CEO Darren Jackson commented on the rationale behind the deal, "This transformational transaction 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."
The deal will result in significant synergies, estimated around $160 million per annum within three years after closing. 2014 cash earnings per share should see accretion of more than 20% excluding one-time costs. Increased scale allows of superior service to customers will should allow for significant cost and revenue synergies.
The deal is subject to normal closing conditions including regulatory approval and is expected to close by the end of this year, or early into 2014. The board of directors of both companies have already approved the deal.
Preliminary Third Quarter Results
While Advance Auto Parts was originally scheduled to release its third quarter earnings on the 31th of October, it already provided preliminary results for the quarter.
Sales rose by 4.3% to $1.52 billion, driven by the acquisition of B.W.P. Distributors and the opening of new stores, as comparable store sales fell by 2.0%.
Diluted earnings per share are seen around $1.42, up 17% on the year before.
Advance Auto Parts ended its second quarter with $521.0 million in cash and equivalents. The company operates with $605.0 million in total debt, for a modest net debt position of $84 million.
Note that the company has received a financing commitment from J.P. Morgan (JPM) for the deal. Financing will take place through senior notes, bank debt and cash at hand.
Revenues for the first six months of the year came in at $3.56 billion, up 4.3% on the year before. Net earnings advanced by 2.4% to $238.7 million. At this pace annual revenues could come in around $6.4 billion, as the company guides for full year earnings of $5.30-$5.45 per share, around $400 million.
Factoring in gains of 18% on Wednesday, with shares exchanging hands at $97 per share, the market values Advance Auto Parts at $7.0 billion. The market values the old company now at 1.1 times annual revenues and 17-18 times earnings.
Advance Auto parts pays a quarterly dividend of merely $0.06 per share, for an annual dividend yield of 0.2%.
Overt he past decade, shares of Advance Auto Parts have seen huge returns. Shares have roughly quadrupled, increasing from $25 in 2004 to current levels approaching $100 per share at the moment.
Between 2009 and 2012, the company has increased its annual revenues by a cumulative 15% to $6.2 billion. Note that net earnings rose by some 43% to $387 million while earnings per share saw an extra boost after the company retired nearly a quarter of its shares over the past four years.
It is easy to understand why investors are super excited about the announced deal, boosting the value of the company by around a billion. Advance Auto Parts can buy GPII at a significant discount to its own revenue multiples while it stands to reap all the benefits from the deal, through synergies.
Before the deal had been announced, the market valued Advance Auto Parts at about $6.0 billion, roughly 1 times trailing annual revenues of $6.3 billion, as the company operates with a rather flat net debt position.
At the same time GPII is valued around $2.04 billion, just 0.7 times annual revenues. Applying a similar 0.95 multiple as Advance Auto Parts, would value the business at $2.75 billion. This is a strong indication that Advance bought the company at a nice price, assuming similar profitability levels. In the investor presentation, Advance Auto Parts says it pays 9.3 times adjusted EBITDA, or 5.4 times adjusted EBITDA once factoring in all the synergies.
Besides this, Advance Auto Parts only estimates $190 million in one-time costs to reap annual cost synergies of $160 million per annum in three year's time.
As such Advance Auto Parts will operate a $9.2 billion business going forwards which should reported earnings per share growth of a least 20% next year. Note that 2013 earnings should come in around $5.40 per share, suggesting earnings per share of $6.50 in 2014, with further accretion in 2015 as all synergies roll in.
As such, shares trade around 15 times pro-forma earnings in 2014 as the company should see more accretion in the year's following, possibly adding another dollar in earnings per share by 2015.
Still I am not super-excited about the current valuation. Recent growth has come from acquisitions, although much smaller ones. Organic growth remains negative, partially due to strong sales of new cars, requiring fewer replacement parts.
While Advance Auto Parts has made a great deal, a great deal of the benefits have already been priced in today. Congratulations to management and existing shareholders, but I have to remain on the sidelines for now.