This is the time of year that everyone makes predictions for the coming year. So I’ll join in. My prediction for 2017: nothing will change.
Last year I made three predictions for 2016. Consolidation would continue. Technology will continue to impact the industry. Interest rates will rise.
My predictions for 2017? Consolidation would continue. Technology will create winners and losers Interest rates will rise.
Consolidation continues strong
Fast forward 12 months and consolidation continues. In 2016 Caliber added 111 locations. Service King 35 locations. Boyd 55 locations. ABRA 21 locations. Boyd continues to reiterate that they are well positioned for a major acquisition. Rumors continue to swirl of a large deal in the works. Major consolidators raised large amounts of capital in 2016 and will put it to work aggressively in 2017.
Consolidation continues in the paint jobber market as well. FinishMaster’s parent company Uni-Select now operates 250 locations and 14 WD locations across the US and Canada. NCS and Single Source merged. A number of smaller acquisitions were announced across the U.S. and Canada.
Consolidation continues in parts distribution as well. LKQ leads the charge here, increasing sales to an estimated $9.5 billion in 2016, up over 30% from the end of 2015. LKQ has consistently focused on using M&A to drive growth and diversifying away from collision revenue and diversifying into Europe (I will discuss more on LKQ when they release their year-end numbers later this quarter).
Outside investors and entrepreneurs will continue to enter the industry, driving additional consolidation and taking advantage of the fragmentation in the industry. Big deals and sellers that know how to articulate their value will still make headlines and command premium prices (they always do), smaller deals will continue to get done. But prices will not be what they were in 2014 and 2016, especially for smaller operators. Brownfields and greenfields will continue to become an important growth tool for companies with the resources.
Technology will create winners and losers
Technology continues to impact the automotive aftermarket. OEMs continue to increase the amount of advanced materials in a vehicle. The issue of pre and post repair scanning have hit the industry by storm. Autonomous driving could mean the death of an entire industry.
Telemetry and telematics will have a major impact on the automotive aftermarket in 2017. Vehicles are already highly computerized. The ability to remotely diagnose, evaluate, and control a vehicle will create a tidal wave of new applications and opportunities for firms positioned at the intersection of automotive and technology. The winners will be companies embracing this technology. But this same technology will present existential risks for some companies. Some companies will fail. New companies will be created. The automotive aftermarket will be different because of technology.
Interest rates will rise
The Fed has taken a very slow and cautious approach to raising rates in 2016, increasing rates only once in December to 0.75% from 0.50%. But the Fed projects three more increases in 2017 as the economy continues to expand, potentially doubling the federal funds rate in the next 12 months.
At present there is still a large amount of capital available. “Crushing amounts” as one private equity partner confided to me recently. Interest rates are still at record lows. However when interest rates rise, asset values tend to fall in response. Highly levered entities may find debt loads difficult to sustain. As companies prepare for the inevitability of raising rates, some will pull away aggressively pursing deals at a breakneck pace.
In sum, my projection is that 2017 will be a continuation of 2016. Premium platform targets will continue to command a price premium, but prices for smaller businesses have passed the peak. A big deal, merger, acquisition, or recapitalization will likely be announced. New investors will continue to enter the market, especially as seller pricing expectations become more rational compared to the past few years. Technology will continue to cause major shifts in industry dynamics. Those at the forefront of the technology curve will be best positioned to adapt to this change, and perhaps even drive the change. The wildcard is still the economy, and federal reserve policy under a new presidential administration.
At present, it is very much a “Goldilocks” economy to buy or sell a business. Not too hot, not too cold, but just about right. But a goldilocks environment rarely last long. In the children’s tale, the 3 bears eventually come home and goldilocks, surprised by the obvious, goes running.
Of course, I’m speaking in very broad strokes. If you want to know more about what this means in your business or discuss how we can work together, please use my contact page to get a hold of me (subscribers hit REPLY to get me directly).
Happy 2017. I look forward to increasing the value of your business this year!