This MTD exclusive was provided by Michael McGregor, a partner at Focus Investment Banking LLC (focusbankers.com/ automotive/tire-and-service) and author of MTD's monthly Mergers and Acquisitions column.
A friend at Monro Inc. asked me last year if I could name one company that was in retail, commercial and wholesale tires and excelled at all three.
Fast forward to this past June, when Monro sold its wholesale tire operations to American Tire Distributors Inc. (ATD) for $105 million and entered into a long-term agreement that will see ATD supply tires to the stores in Monro’s retail network.
It was smart of Michael Broderick, Monro’s CEO, to make this deal early in his tenure. He must have looked at the various segments Monro was in and concluded that the wholesale tire division was not core to the company’s business.
Making this decision early allows him to free up resources, focus his team on Monro’s core retail business and with the ATD deal, improve tire deliveries, reduce costs and drive long-term value. He’s clearly putting his stamp on the business and preparing it for more store conversions from auto service to tires.
Publicly traded companies face challenges that many privately owned companies don’t have in that there are all sorts of “activist” shareholders who invest in public companies to force change, like Ides Capital, an investor that’s pushing Monro for a strategic review.
Activist shareholders look for inefficient balance sheets, stalled growth, unclear strategy and questionable investment decisions. Publicly traded company CEOs need to keep one eye out for these shareholders and sometimes make pre-emptive divestments to keep the business on the best path.
Privately held companies don’t face the same outside pressure as publicly traded companies, but they also can benefit from a periodic review of their portfolio of businesses.
There are tire dealerships of all sizes that have a nice chain of retail stores, but profitability could be dragged down by a wholesale division that loses money. When one adds in the cost of carrying tire inventory and today’s higher fuel costs, the profit picture sometimes looks even worse for them. And we’ve all seen great retail tire companies with unprofitable commercial divisions or large commercial tire dealerships with a sprinkling of break-even retail stores.
It’s pretty clear that each segment - retail, wholesale and commercial - requires different core competencies to be successful. Retail is a people-and-process business. With wholesale, you better be great at logistics. And to survive and grow long-term in commercial tires, you better be good at making yourself indispensable to your tire supplier of choice - and to your customers.
The tire industry is changing faster than ever, so every company needs to analyze its strategy and determine how its business fits with that strategy. Consider how segments fit with your company’s overall vision and mission, how they stack up against competitors and how your dealership’s competencies and financial strength match up to the challenges ahead. Next, look at underlying business trends and long-term growth outlook.
Analyzing return on assets employed is one way of determining the relative return one is getting. It’s calculated by taking the net income of a business segment - be sure to fully allocate a fair share of corporate overhead - and dividing that by the assets employed in the business segment. Other metrics to consider are:
a. the cash generated by each segment and whether it’s worth the effort;
b. projected profitability, and;
c. expected revenue growth.
If it is determined the business segment is no longer a fit, consider whether divesting it as a going concern or selling off those assets makes sense.
One of the benefits that may come from divestment is freeing up capital to invest in higher-growth businesses. Or maybe you can use the cash to invest in technology to improve the customer experience? Perhaps your company can enter into new geographies? Certainly many companies end up financially stronger, reenergized and more focused after divestment.
Most companies wait too long to divest non-core divisions. Inertia must be one reason. Or perhaps there is disagreement among owners and senior management in a family-owned business? This is where hiring outside advisers or strategy consultants may make some sense.
In every case, it’s always better to sell when your business is healthy and before it really slides. Depending on the size and profitability of a carve-out, private equity firms may be interested, but certainly strategics are good buyer candidates.
A divestment can be disruptive to an organization and cause anxiety among employees. And you certainly don’t want competitors finding out. I always advise keeping the decision to divest extremely confidential until a deal is done.
After it’s announced, communicate regularly with customers. Keep key employees motivated and incentivized through the period of uncertainty. And make sure that the going forward vision is clearly communicated often.
