Mergers and acquisitions in automotive paint distribution are heating up. After years of aggressive consolidation in the collision repair customer base of paint distributors, it is logical to see consolidation take hold downstream. Paint is a small but critical component of the $30 billion North American collision repair market.
A year and a half ago I predicted we would see increased mergers and acquisitions in automotive paint distribution. And again a year ago. As industries consolidate, it is common to see suppliers consolidate alongside their customer base. An example not far from the automotive aftermarket segment is in the automotive OEM segment. As automotive OEMs consolidated, so too did Tier 1 suppliers, which created additional consolidation in Tier 2 suppliers. We also continue to see consolidation at the dealer level, albeit at a much slower pace than other segments of the automotive aftermarket as well. This type of downstream consolidation makes sense – as customers grow, suppliers need to grow with their customers to continue to remain competitive, drive down costs and meet service level agreements.
Last year saw a number of mergers and acquisitions in automotive paint distribution. As in collision repair, there are four large distributors with regional footprints that have grown rapidly, primarily as a result of acquisitions over the past year.
Last year NCS merged with Single Source, effectively doubling in size in one transaction. FinishMaster added 46 new stores in seven acquisitions in 2016, and an additional 16 more stores in the first six weeks 2017. LKQ, a company that has grown extensively through acquisitions, was largely quiet on the PBE front. Wesco did some small deals in 2016 as well.
FinishMaster: A brief history of mergers and acquisitions in automotive paint distribution
FinishMaster’s recent growth is noteworthy. FinishMaster recently has acquired a number of small and mid-sized jobbers in the U.S. and Canada after a significant shift in corporate strategy. In mid-2015 FinishMaster’s parent company, Uni-Select divested its U.S. based automotive hard parts business to Icahn Enterprises controlled by famed corporate raider Carl Icahn (for a great personal history and review of some of his highest profile deals I highly recommend King Icahn: The Biography of a Renegade Capitalist). Uni-Select used the proceeds to immediately pay down all outstanding debt, and redeployed the remaining capital to fund an acquisitions based growth strategy.
At the time Uni-Select divested its parts business, there was some criticism in the press that this was a poor deal for Uni-Select. Uni-Select itself acknowledged that they sold the division at “net tangible book value of assets”, in layman’s terms, at cost. When the deal closed, Uni-Select received total cash proceeds of $324 million. However, at the time Uni-Select acknowledged that by selling the U.S. based parts business, it allowed the company to dispose of an asset heavy low margin business, strengthen the balance sheet (i.e. completely pay down all outstanding debt), and most importantly, reinvest in high potential markets and rapidly “seize acquisitions”.
At the end of June, 2015, a month after the transaction with Icahn closed, Uni-Select reported half year Paint and Related Products sales of $308 million. By the end of 2015 Uni-Select completed 7 acquisitions and added 10 new stores. Sales at FinishMaster increased to $619 million in 2015, up 8% year over year. In 2016 the FinishMaster completed another 7 acquisitions adding 46 stores, and increased revenues 22% to $753 million. This year FinishMaster has already added 16 locations, with a strong pipeline of additional deals on the table. Since January of 2015, Uni-Select as a whole has completed 33 transactions and added 114 stores across the U.S. and Canada.
Predictions: The future of mergers and acquisitions in automotive paint distribution
I predict we will see continued mergers and acquisitions in automotive paint distribution. Structurally this is logical as the collision segment of the industry continues to consolidate. Economically this makes sense as companies like Uni-Select can grow rapidly through M&A. Building economies of scale is strategically important in distribution, and well executed M&A allows companies to build scale.
Management at Uni-Select has indicated they continue to pursue mergers and acquisitions in paint distribution as a growth strategy. They have developed an internal playbook to make M&A a core competency in the way they do business. At present, Uni-Select estimates they have about 30% market share but aggressively want more.
As a result, Uni-Select’s share price has doubled since January of 2015. Sales have increased steadily since the company divested its parts business. More importantly, profitability and cash flow has increased steadily. Despite having divested 40% of top line sales in the Icahn transaction, Uni-Select’s 2016 cash flow and net earnings are, on an absolute basis, greater now than the end of 2014, and roughly doubled on a relative basis.
The economics of a growth strategy focused on M&A and inorganic growth are compelling. Uni-Select is simply one example of many in the automotive aftermarket. If you would like to explore how to execute your own M&A growth strategy in your business, get in contact with me (subscribers email me direct).
In the future we will talk about dealerships, and explore the opportunity for dealer groups to expand into collision repair in light of industry consolidation, increasing vehicle technology, and evolving industry trends. It’s a fascinating time to be part of the automotive industry with much opportunity.
Until next week!