Are mergers and acquisitions still going on during this very strange time, you ask? The short answer is yes.
While some of the larger players in the space like Monro Inc. have publicly stated that all acquisitions are on hold, below the level of the largest strategic acquirers, activity is still chugging along. How can this be? Let’s examine some reasons why from both the buyer and the seller’s perspectives.
If a buyer was interested in expanding via acquisition before the COVID-19 pandemic, they’ll still be interested now, albeit a bit more cautiously.
Private equity has backed companies like Mavis Tire, which went through with its deal to acquire 112 TBC stores in the Atlanta, Chicago, Boston and Philadelphia markets even during the pandemic.
Mavis is chasing revenue and profitability to improve its value and is looking to do this in as short of a period as possible.
While I have no doubt that Mavis and other dealerships who are in positions to make acquisitions are managing their cash flow and debt ratios with extra caution right now, they also have to be looking beyond the summer to when things get closer to normal and their expansion plans can continue or even speed up.
Speaking of normal, one bright spot that every tire dealer needs to look at has to be the Dow Jones Industrial Average, which, as of this writing, was up 35% from its lowest point on March 23. That’s a leading indicator that things may be getting better down the road a bit.
In addition to a buyer’s strategic determination to grow, there is still a good amount of money that lenders can provide in order to make deals happen. Many lenders are flush with cash and trillions of dollars from the United States Treasury have just flooded the economy, so there is no widespread liquidity crisis for many businesses.
No buyer puts in all cash on M&A transactions. Available leverage enhances deal valuations and greases the M&A wheels.
While buyers can and still want to buy tire businesses, expect them to chase quality or good value in the short term. Quality is represented by one tire dealership that I know which experienced a better April 2020 than April 2019 or by a tire chain that I’m currently representing which has a solid footprint, well-maintained stores, loyal employees and good customers.
Value is represented by transactions not being in the lofty multiple ranges of just last year. If a multi-store chain was expecting a certain multiple before the unprecedented economic shock that took place earlier this year, they should be lowering their expectations.
In other words, a transaction in which the seller has reasonable valuation expectations is one that is more likely to attract a buyer in this market.
Expectations of finding fair values are attracting new buyer entrants that have been on the sidelines, waiting to get in.
For example, some private equity companies looking for that platform investment that they can use to bolt on acquisitions are snooping around the market. Another example is my overseas client that is looking for commercial tire distribution companies in the U.S. to invest in.
Both of these types of buyers have either long-held strategic objectives or interest in the space that you play in and they see a window of opportunity to get the attention of sellers who want to, or have to, sell right now.
Now let’s look at M&A from the seller’s perspective in this strange time. First, if you are an aging tire dealer with no family to take over your business, retirement still beckons and at some point, you may want to sell.
The reality is that it takes a while to make a sale happen, so you might want to think about starting the process now.
If you are a tire dealer whose business has been hurt during this downturn to the point where you really need to sell, don’t wait. Do it now, while you still have something to sell.
And if you have a division within your business that is not core to your mission, you still might want to sell it in order to focus your attention and resources on what benefits you the most.
In terms of regional activity, M&A activity is good in the northeastern U.S., as of this writing. However, it’s a little quiet right now in the central and southern regions, but this could change as the year proceeds.
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 [email protected].
