For the past few weeks we have been analyzing the results of the Boyd Group Income Fund (Boyd). Boyd is the largest operator of collision repair facilities in the world by number of locations, and one of the top four in terms of revenues. Boyd is also a serial acquirer of other collision and glass services businesses. Founded in 1990 as a single location in Winnipeg, Canada, Boyd has grown to be the largest provider of collision repair services almost exclusively via acquisition, or buying other collision repair businesses.
Previously I spoke about the importance of developing new core competencies to compete in the new era of collision repair. We also discussed at length how a business owner can leverage the tools of corporate finance to drive systematic growth. Boyd is an example of a company that has effectively done both to become a world leader in collision repair and glass repair services.
The price and terms of acquisitions are always a hotly discussed topic in any industry, collision repair is no exception. While most transactions are shrouded in confidentiality and strict non-disclosure obligations, one benefit of having publicly traded companies active in the industry is that any transaction that is “material”, or something that may have a significant influence on the outcome of business operations, must be disclosed. While the details of the transaction are often not disclosed to protect competitive information, the major points of the transaction are listed.
This week we will look at the major transactions that Boyd has disclosed publicly between 2012 and 2014. You can access the 2014 annual report directly here, as well as previous annual and quarterly reports on Boyd’s Investor Relations page. We will also look at the numerous individual transactions that are aggregated in the annual reports. There are unique differences to note between MSO acquisitions and single location acquisitions. We will also draw some general conclusions regarding business pricing and terms. However, a critical disclaimer – the conclusions we draw will rely upon general industry financials, and are not necessarily representative of the specific business transactions. Regardless, using broad industry metrics allows us to draw general conclusions regarding acquisition trends in the industry.
Boyd’s Inorganic Growth Strategy
Every year in the annual report, management sets inorganic growth targets, ranging from 6% to 10% growth in single locations and also commits to pursuing large MSO acquisition opportunities. In 2014 Boyd acquired 64 locations consisting of 11 single locations, developed five brownfields and acquired three MSOs with 48 locations. (Boyd also acquired Netcost Claims Services in 2014 and Glass America in 2013, both of which will not be considered in this article).
But a bit of history is useful in generating perspective. In 2012, a year many industry insiders considered consolidation to increase substantially in pace, Boyd acquired 15 single locations and 39 MSO locations, totaling 54 locations. In 2013 the company acquired 25 MSO locations, 17 single locations, as well a Glass America, a retail glass service provider active in 23 U.S. states. In aggregate, Boyd nearly doubled in size in merely two years, growing from $434 million of revenues in 2012 to $844 million in 2014 (all amounts are expressed in Canadian dollars unless otherwise stated). This rapid growth was almost exclusively a result of acquisitions.
Acquisition Evaluation Metrics
In evaluating transaction terms, it is difficult to draw specific conclusions; however, we can identify trends using proxy data. For example, we can approximate the existing sales at these businesses by evaluating the contribution these businesses provided to company-wide revenues. Much caution must be taken in this approach as the sales reported by Boyd are post acquisition, which means that the company may have benefited from an increase in sales due to existing relations with key referral partners the prior business may not have had. Additionally, it is difficult to estimate the profitability of companies acquired as these numbers are often not disclosed. Even when these numbers are disclosed, the acquired locations certainly benefit from cost reduction strategies, or cost synergies, by removing redundant administrative expenses and by improving gross margins by consolidating purchasing making it difficult to estimate pre-deal profitability of the acquired companies.
A more general way to evaluate the terms and trends of transactions is by looking at the sale price per location and how the price per location for a large MSO differs from a single location business. Again, looking at these numbers offer general trends, rather than expressions of specific value. But they do demonstrate the importance of scale in determining enterprise value (remember: Enterprise Value is the gross value of the business; any debt would be subtracted from enterprise value to arrive at the value of the equity).
The impact of goodwill on the total purchase price allocation is also a telling indicator. In a typical acquisition, asset values are “stepped up” or re-assessed so that the current asset value is reflected on the balance sheet. The purchase price allocation often has significant tax implications, and much time and analysis is spent on both sides of a transaction determining the fair purchase price allocation of the assets acquired. However, often the total purchase price is in excess of the stepped up value of assets listed on the balance sheet, creating what is called “goodwill”. Goodwill is the accounting representation of the idea that the whole is worth more than the sum of the parts. In the collision industry goodwill is generally attributed to the assembled workforce and the operating know-how and reputation of key personnel. In general, the more goodwill in a transaction, the more value the assembled workforce and management bring to the company, and the higher total enterprise value. Additional discussion of goodwill can be found in the analysis of Boyd’s balance sheet.
MSO vs Single Location Acquisitions
From the beginning of 2012 to the end of 2014 Boyd completed eight major MSO acquisitions totaling 112 shops representing roughly $275 million in annual revenues. Total consideration paid for these eight major acquisitions was $183 million.
Separate from these 8 major MSO acquisitions the company also acquired 43 individual locations over the same time period. Total consideration provided for these 43 acquisitions totaled $19.8 million.
Using nothing more than the total number of locations as a barometer of value, it is clear that MSOs command a substantial premium relative to single location operations. On an aggregate per location basis, the total consideration provided in major MSO acquisitions averaged $1.6 million per location while single location transactions averaged a mere $460 thousand per location.
There are a number of legitimate reasons for the difference in pricing. The single location transactions may generate substantially less revenue. These locations may be substantially smaller than locations at the MSO facilities. The single locations may have substantially higher cost structures, outdated equipment, a lack of a management team, or a plethora of other factors that cause these businesses to be worth substantially less.
It is interesting to note, however, that the MSOs Boyd has acquired are not all large behemoths churning out millions upon millions of revenues annually per location. In fact, quite the opposite. Boyd tends to acquire MSOs that operate locations that generate between $1.5 and $2.5 million in revenues a year. The MSOs command a premium not because they do more sales per location. Instead, the MSOs are able to command a premium in a transaction due to the assembled workforce and management team that operates on at a larger level. In other words, these MSOs have built a valuable business that is worth more than the sum of the parts. In fact, the average goodwill recorded in a large MSO transaction represents nearly 50% of the total consideration and increases as the number of locations increases while single location transactions on average record no goodwill.
Source: Boyd Annual Report 2012, 2013, 2014; Author’s Calculations
It is also interesting to note pricing trends of both MSOs as well as individual locations over time. While we demonstrated that the larger the business the more valuable it likely becomes, time and competitive pressures have increased the overall value of collision repair businesses. In 2012 Boyd acquired 15 single location businesses for a mere $4.2 million, or $280 thousand per location. In 2013 Boyd acquired 17 locations at an average of $520 thousand per location. In 2014 Boyd acquired 11 locations at an average of $610 thousand per location. Newly acquired single location stores averaged just over $1 million in revenues in 2014 and just under $1 million in revenues in 2012. So while there has been some revenue growth, the average price per single store acquisition doubled in two years.
Source: Boyd Annual Report 2012, 2013, 2014; Author’s Calculations
Seller Note Structure and Terms
Specific structure and terms of the final purchase agreements are sealed and both sides are bound by non-disclosure agreements. However, it is common in many business transactions for the seller to finance a portion of the transaction, otherwise known as a seller note or referred to as carrying paper. This agreement is structured as a loan, and the buyer pays the seller the principal plus interest at a negotiated rate and term.
From 2012 to 2014 Boyd issued in aggregate $54 million ($Can) in seller notes. At the end of 2014 the company had just under $49 million ($U.S.) in seller notes outstanding. Interest rates on these notes range from 4.0% to 8.0%. The notes have terms extending as far out as January 2027, but the majority of the notes are due in full within the next five years.
It is interesting to note that the amount of seller notes issued relative to the total consideration provided has steadily decreased over the past 12 years. This trend holds constant for both single location acquisitions as well as MSO acquisitions.
Source: Boyd Annual Report 2012, 2013, 2014; Author’s Calculations
Conclusions
While valuations are increasing across the board, substantial value is created by building scale in the collision industry. Building scale is much more than opening a number of locations and slapping a name on the building. Scale involves building out a business that is worth more than the sum of the individual parts. Creating a deep management team, developing core competencies in corporate finance, creating and executing on a growth plan that delivers both organic and inorganic growth, and reinvesting in technology, recruitment, and equipment are some of the things that the large consolidators are willing to pay a premium to acquire.
The numbers discussed above represent a very high level overview of valuation trends in the industry. Valuation is determined by cash flow and profitability as well as other less tangible assets such as reputation, scale and ability to grow. Locations and revenues are crude metrics designed to show general trends, and in no way should they be used to support a valuation of an individual business. Regardless, two trends are clear: valuations have increased rapidly over the past two years but there is even more value to be created by building scale in the industry.
If you are going to be at NACE, please be sure to visit my NACE 2015 page. I am making myself available for a limited number of one on ones to meet readers of my insights face to face so that we can discuss how these industry trends impact your business. There are only a few slots left so be sure to sign up sooner rather than later.
If you are not able to attend NACE I am still eager to hear from you. How have you attempted to maximize the value of your business? Have you attempted to build scale? If so, what challenges have you faced? You can contact me by email via my contact page to discuss these topics at any time. I find the transformation in the industry truly fascinating and all communication is kept strictly confidential.
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