Point S International plans to add 1,000 stores to its network — in China.
Geographical expansion. Say you are in Chicago with pretty good market share and decent store coverage. Any larger dealers in nearby states not already in Chicago and looking to expand are some of your potential acquirers, as they are nearby and familiar with the operating environment of your market.
Speed. Greenfields take time and zoning boards are at times misguided. You’d think zoning boards would welcome tax-paying tire and service retailers, but unfortunately, many municipalities don’t. It’s faster to buy than build in many markets.
Acquire people and talent. It’s a full employment economy, and it’s hard to find qualified technicians, experienced salespeople and managers who know how to run a quality, profitable operation. Buy the talent in an acquisition.
Acquire new skill sets. A recent client had an innovative call center that the buyer was looking to duplicate for its other stores. Another who employed a more disciplined service delivery process, knew how to enhance customer loyalty, and was social media-savvy was attractive for those reasons.
Competitive strategy and response. Why did Monro Inc. finally enter California with the Certified Tire & Service Centers Inc. acquisition? Well, California is the fifth largest economy in the world with lots of people and lot of cars. But if Monro took its time going from state to contiguous state as it had been doing, by the time they had reached New Mexico all of the attractive opportunities in California would have been gobbled up by competitors.
Financial opportunity. Sometimes an acquirer looks at a business and knows he or she can do better. If a business is at 6% EBITDA (earnings before interest, taxes, depreciation and amortization) and an acquirer thinks he can buy it fairly and take it up to 12% or higher, that’s an incentive. Those are all valid and good reasons why mergers and acquisitions happen. Now, here’s the underlying reason deals are done.
It’s a form of arbitrage. Broadly speaking, arbitrage is when someone takes advantage of the differences in price of an asset and pockets a “risk-free return.” Let me explain how this works with a hypothetical example.
Joe’s Tire has three stores in Greensboro, N.C., doing collectively $6 million in revenue annually, and dropping 10% adjusted EBITDA or $600,000 annually. Joe’s life is pretty good, but he’s pushing 67 and wants to spend more time fishing at his cabin near Asheville. Joe figures it’s time to exit.
Sue’s Tire is a friendly, respected competitor that Joe has known for a long time. Sue has 10 stores around the Charlotte area, and she’s made an offer to buy Joe’s business — not the real estate that Joe owns — for $1.8 million or three times adjusted EBITDA. And Sue will lease the locations from Joe at fair market rents for the next five to 10 years. Joe finds that to be reasonable and fair, and he sells the business to Sue.
Sue pays attention to the acquisitions making news in Modern Tire Dealer, and based on what she learned in her 20 Group, she thinks her 10 stores doing about $17 million in revenue and $2 million in annual adjusted EBITDA is worth at least a 6 multiple or around $12 million. She’s known Joe for 10 years, knows that he runs a good business. She understands his market, his tire/service mix, his employees and his types of customers. For Sue, it’s a no-brainer to buy Joe’s business to expand her footprint with a quality operation.
Now, let’s see what happens to the value of Sue’s Tire after she buys Joe’s Tire:
So, Sue’s Tire buys Joe’s Tire for $1.8 million cash or a 3× multiple to EBITDA, and after the deal closes, because she’s larger, more profitable and more diversified in the state, her 13 stores doing $23 million is deserving of a slight bump in value to perhaps 6.25 × EBITDA. Her business value jumps $4.25 million from $12 million to $16.25 million ($2.6 million EBITDA × 6.25) and it only cost her $1.8 million to buy Joe’s Tire.
Another way to say this is that Joe’s $600,000 in profit is worth $1.8 million to him in a fair transaction, but the market says that for her it’s worth an additional $4.25 million on top of her original $12 million in value. That difference of $4.25 million (really $2.45 million net after paying Joe $1.8 million) is as close to arbitrage as one can get in this game. Now, it’s never, ever a risk-free return for the buyer because buyers really don’t know everything about what they’re buying (think environmental issues, hidden liabilities, pending employee lawsuits etc.), but because Sue knows Joe’s business and knows how to keep it running smoothly and perhaps better, it’s as close to risk free as she might get.
The financial markets reward bigger and more profitable businesses. They provide liquidity to these larger businesses in the form of debt and equity to keep them growing. That’s why the game is played. Now, there are certain things that Joe might have done to get a higher valuation than he did. I’ll save those revelations for another day. ■
Michael McGregor is a partner at Focus Investment Banking LLC (focusbankers.com/tire-and-service) and advises and assists multi-location tire dealers on mergers and acquisitions in the automotive aftermarket. For more information contact him at firstname.lastname@example.org.
Point S International plans to add 1,000 stores to its network — in China.
Pep Boys – Manny, Moe & Jack tire and service centers is a national sponsor of Toys for Tots, the program run by U.S. Marines.
Goodyear Tire & Rubber Co. will report its third quarter results on Friday, Oct. 25, to be followed by an investor conference call at 9:30 a.m. ET.
In response to the increasing popularity of gun metal grey alloys, Hamaton Inc. has released a TPMS valve for its U-Pro Hybrid 2.0 dual frequency, configurable and programmable sensor that matches the wheel’s distinctive finish.
“Light truck remains the beacon. It remains the future. It’s very bright.”
Point S International has recognized its leaders and dealers in Canada with the Award of Excellence.
The Auto Care Association will present the latest solutions for standardization of the repair of automated vehicle systems during next month’s Automotive Aftermarket Products Expo.
The tire pressure monitoring system (TPMS) on certain models of the Chevrolet HHR and Malibu (2007-2016) alerts the driver of a large tire pressure change in any of the four tires while the vehicle is being driven. The system also will display individual tire pressures and their locations on the driver information center (DIC).
All over the world, people are talking about “climate change.” In Europe, this is hardly surprising, as over the last couple of years there has been some pretty erratic weather here.
Yokohama Tire Corp. will highlight its racing heritage at next month's Specialty Equipment Market Association (SEMA) Show in Las Vegas, Nev.
Matthew “Mack” Robinson was the older brother of baseball great Jackie Robinson. He was also a pretty good track and field athlete, and made the U.S. team that competed in the 1936 Olympics in Berlin. With no coach to help him and running in a worn-out pair of track shoes, Mack broke the world record in the 200-meter race. In fact, he not only broke the world record, he shattered it. And he finished in second place. The man who came in first place was named Jesse Owens.
Virginia Tire & Auto LLC has added to its footprint with the addition of a location in Herndon, Va.
Allen Rubber Company Inc. recently hosted 450 of its associate dealers at an open house in East Norriton, Pa.
Nokian Tyres plc is educating consumers about all-weather tires via a new campaign.
Our recent conversations with dealers leave us with a view that retail sell-out trends showed strength in August with a notable pickup in momentum from July. From a volume standpoint, surveyed dealers reported they saw unit sales improve roughly 3% to 4% compared to the prior year’s period and came in notably above recent growth rates observed in our tire demand index.