At the outset of May, LKQ Corporation (NASDAQ: LKQ), a leading provider of aftermarket services in the automobile industry announced that it had finalized the acquisition of European peer Sator Beheer. The deal, which came in at around $268 million, will give LKQ access to the European market. While pundits have thrashed out the deal from different angles, the predominant argument that the deal was perfectly timed still holds.
What exactly does LKQ do and why did it dig into its coffers for Sator Beheer? LKQ is a leading provider of recycled and refurbished collision replacement parts in the U.S automobile market. In addition to providing aftermarket services, it also provides remanufactured engines and recycled transmissions. Sator Beheer, which offers a similar service in the European market, presents a good entry point for LKQ. The Netherlands headquartered company has an expansive client base of over 6000 customers who are served from 11 distribution centers from the Netherlands, Belgium, Luxembourg and Northern France.
Austerity Hit Europe Presents Ready Market
For most parts of Europe, consumer spending has taken a dip. This comes on the heels of the austerity measures that were introduced to revamp the sagging economy in the region. Because of this, consumers are naturally disposed to spend more on essentials and less on expensive products like automobiles. Those who see the need to spend on automobiles take a slant toward affordable refurbished and recycled cars as opposed to brand new.
LKQ will be able to leverage Sator Beheer's expansive spread in Europe to sell its services. The fact that it has a stronger financial muscle relative to Sator Beheer means that it will not only be able to serve the existing customer base better, but it will also be able to expand moving forward.
Additional Income Stream Good for Financials
Looking at operations in LKQ's home U.S. market, the move to establish an additional income stream was well timed. Spending on new automobiles in the U.S. is increasing. Since the beginning of the year, most of the big automakers in the U.S. have managed to increase their sales year-on-year. In the first quarter of the year, Chrysler's U.S. sales edged up 5% year-on-year, signaling the third full year of consistent growth. Ford's (NYSE: F) April sales also impressed as the automaker was able to increase its sales 18% year-over-year on prolonged strong demand for the Escape SUV and the Fusion Sedan.
Although this increased spending on new automobiles will ultimately create a new market for LKQ, creating an additional income stream is ingenious. Instead of waiting for the recently purchased automobiles to start wearing down, LKQ can rake in returns elsewhere to insure liquidity and holistic growth.
Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.