Another busy week for private equity in the automotive aftermarket. Two transactions in automotive paint distribution were announced. These investments mark the first pure play private equity investments in automotive paint distribution, and, after years of rapid consolidation in the collision repair industry, likely herald the beginning of a new era of acquisitions.
Note: Will you be at NACE Automechanika Chicago in July? If so, let’s connect. I’m hosting the 2nd Annual MSO Craft Beer Tour – space is extremely limited so be sure to sign up on the early list now. Also, as in years past, I am making myself available for confidential one on one meetings, exclusively for subscribers.
Announced Transactions in Automotive Paint Distribution
Two large regional automotive paint distribution companies announced private equity investments: WestView Capital Partners acquired English Color of Texas, and PNC Riverarch Capital acquired Painters Supply and Equipment of Michigan.
English Color is a firm, that in only a couple of years, grew from a handful of locations in Texas to a regional presence across the South, expanding aggressively with assistance from key automotive paint manufacturers. The company now boasts 51 locations across 9 states, and 34 locations in Texas alone. The company’s primary lines are BASF and PPG.
Painters Supply and Equipment of Michigan is a single line PPG Platinum Distributor with 22 locations in Michigan, Ohio and Indiana. Painters Supply and Equipment has not expanded geographically as rapidly as English Color, and has not added additional locations since 2014 but boasts an experienced management team, and significant investments in value add training programs, and unique technology platforms.
Private Equity Sponsors
PNC Riverarch Capital is headquartered in Pittsburg and is affiliated with PNC Financial Services Group, a large retail and commercial bank. PNC Riverarch Capital is currently investing out of a fund with $400 million of capital[i]. PNC Riverarch is only a few years old, recently spun off from larger PNC Equity Partners in 2011. PNC Equity Partners was active in manufacturing and distribution, and PNC Riverarch continues this trend. PNC Riverarch’s acquisition of Painters Supply and Equipment is PNC Riverarch’s second acquisition this year. Based on my research, historically PNC Riverarch invests between $20 million and $50 million per transaction, but has done deals as small as $9.55 million.
WestView Capital Partners is headquartered in Boston and was founded in 2004. It is currently investing out of a fund with $430 million of capital[ii]. WestView is currently invested in 16 portfolio companies (including English Color). At present, the portfolio is heavily weighted towards software and IT/business process outsourcing companies. The fund does, however, have current and past experience with a number of manufacturing and industrial companies. WestView’s acquisition of English Color is the funds third acquisition this year. Traditionally, the fund invests between $10 and $50 million per transaction.
Why is Westview’s acquisition of English Color and PNC’s acquisition of Painters Supply and Equipment Interesting?
With two well-funded private equity backed companies, in addition to the existing large strategic players in the industry, the number and pace of transactions in automotive paint distribution will increase. So too will the competitive dynamics of the industry. Paint distribution is a much smaller in industry than collision repair ($4 billion vs $37 billion) and will likely consolidate at a pace measured in months, rather than years. The entrance of two financial sponsors into the automotive paint distribution industry will lead to additional consolidation and an increase in acquisitions in the coming months. Both PNC and WestView have a history of supporting portfolio companies with additional acquisitions.
WestView actively seeks out platform acquisitions, and takes a very active role to further industry consolidation, supporting portfolio companies not only with additional capital for subsequent acquisitions, but also by leveraging prior experience and assisting portfolio companies with acquisitions by creating deal flow, conducting due diligence, and negotiating with potential acquisition candidates. WestView also takes a very active role in partnering with management of their portfolio companies to drive rapid growth through technology and innovation. This is clearly a fund that will aggressively seek out acquisitions going forward.
It is worth noting the obvious, that the buyers were not strategic in nature (e.g. FinishMaster, NCS, etc.) but financial. Financial transactions (e.g. private equity) tend to have a lower overall purchase price. However, because of the way most private equity transactions are structured, there is often significant upside for those that retain a minority position in the company. (subscribers hit REPLY and email me if you would like details as to why financial buyers pay less or details on the upside of the minority position).
Despite industry headwinds, increasing competition from larger players, and long term technological uncertainty, both the investors and the management teams at both companies made an explicit decision to reinvest into continued growth. It is also interesting that in the case of Painters Supply, the company had long term outside management. It is generally rare to see privately held companies of this side retain outside management and is generally a net positive in the context of succession planning.
I Want to Help You Make Great Acquisitions, Together
Now is a great time to expand your paint distribution business. But because the North American industry is relatively small, consolidation will take place likely over the course of months, rather than years. The window of opportunity for regional players to leverage your existing base of operations to drive growth will be limited.
Some will suggest that the sky is falling and now is a great time to exit (and that may be true for some it is not true for all). But the entrance of institutional money validates that now is a great time to grow.
I want to help you grow. Hit REPLY and we can talk about growth opportunities. We can talk about how to increase the value of your company. We can talk about how to use the same buy-side M&A strategy to grow your business that private equity and strategic acquirers use.
Until next week.