Evaluating ABRA’s Recent Sale
In early August, Minnesota-based ABRA Auto Body & Glass announced that its principal owner, Palladium Equity Partners, reached an agreement for the company to be acquired by private equity firm Hellman & Friedman LLC and the ABRA senior management team.
According to some reports, the sale could bring in $500 million or more. Since Palladium’s purchase in October 2011, ABRA has seen 10 add-on acquisitions and now operates 186 company-owned shops and 48 franchised locations across 19 states.
In July, Palladium announced that it recapitalized ABRA, which allowed the equity firm to return $24 million in capital to investors in the company, representing 44 percent of the firm’s invested capital.
ABRA hired Harris Williams & Co., a middle market investment bank, to advise on the sale. Joe Conner, managing director of the transportation and logistics group at Harris Williams & Co., recently spoke with FenderBender about the sale.
Can you provide an overview of the ABRA sale and how it came about?
The deal that just closed in the third quarter of 2014 was for Hellman & Friedman to become a new majority partner, allowing the current ABRA management team to continue building the business. That management team will also remain shareholders, which they have been for quite some time now.
We had known for a while that Hellman & Friedman had an interest in this space. They used to own Mitchell so they’re very familiar with the space and have a very good handle on the long-term trends. They were trying to find a way to get into the space again and play on the consolidation trend.
All of these private-equity firms typically invest with a five-year investment. They sit down at the beginning of that investment period, set up a plan of what they want to look like in year five, and upon hitting that goal, they plan to sell. Palladium and ABRA management did the same thing, and ABRA managed to hit the goal in only a couple of years. That’s what accelerated the exit plan.
As ABRA starts to get to a certain size, having a bigger, more capitalized partner will help them continue that growth. Just on the surface, Palladium is a $1.3 billion company in terms of funding, while Hellman & Friedman is north of $8 billion. Hellman & Friedman is a great partner that will be there ready to support them in any way they need to execute their consolidation platform to the extent that they need capital.
There was a lot of interest in ABRA. When you look at overall activity in the space with Service King and Caliber having new partners, there’s clearly a lot of interest in this space and there were other offers. That being said, it was not a difficult deal to get done.
Keeping in mind your recent work within the market, why has collision repair become an attractive industry for investors to get into?
I think it’s a couple of things. First of all, it’s a big market. If you look at the universe of 30,000-plus collision centers out there, that’s quite large. Another advantage: It’s a very necessary service. It’s not like there’s an alternative once you crash your car. It’s a need-based service.
The other dynamic at play has to do with the insurance companies. I think the insurance companies are supportive of this consolidation because they’re looking at a world where you need to make sure you’re providing great customer service to your insurance customers. Body shops tend to be extensions of that customer service. If you have a bad experience after an accident, you don’t blame the body shop, you blame your insurance company. It’s considered a bad experience with your insurance company. They realize that they have to be thoughtful about that. The shops that are performing really well are the guys that can afford to put in technology, infrastructure, training and additional things that require significant investment. That’s where the large MSOs are in a great position to step in and do that for the insurance companies.
There is also a big market opportunity. When you look at the largest players in the space compared to the size of the industry, you don’t often see an industry dynamic where the big guys are as small as they are in this industry, relatively speaking. The top four players, by locations, have well less than 10 percent of the overall collision repair center locations in the country. And when you consider that all four of the major players have been out actively acquiring, that is even more impressive. If they were to double their market share, it will still be less than 10 percent of the industry. I feel there’s still a big white space available for growth and we can continue to consolidate the market for years.
Compared to other industries you have worked in, is that market opportunity you mentioned unusual?
It has been an investment thesis for many years to take a highly fragmented industry, consolidate it, and at the end of that consolidation, you’re left with a few big players. You see it in all segments: Health care, general industrial, distribution. You see it everywhere.
I think what’s unusual is that you don’t see too many industries at this point that are still in the early innings of consolidation. Lots of other industries that are now very well consolidated looked like the collision repair industry of today 20 or 30 years ago. For example, you can look at what American Tire Distributors has been doing in the tire distribution space. It was a very fragmented market when they started and they have been consolidating that market for years now. It’s a very different market now for them than when they started on this path. Another example is the healthcare space. We see a lot of stuff in that area around hospitals, home health. That area is becoming really consolidated.
That’s the difference here. This is an industry that’s just getting started. If you look at where the big MSOs were five years ago, they were not that big at all. And they certainly aren’t big now. Between them, they have less than 1,000 shops. There’s still 29,000 more to go.
What makes ABRA attractive to investors?
They are very well known in the industry as being great operators. If you look at their customer service metrics or any of the things that are important to insurance companies, they are at the top of the industry. They have a great team that is very well respected and very well known. They have been around for a long time.
If you think about a company that has great operations and the ability to acquire businesses, that’s a great combination for them to have in the eyes of investors.
What can a shop do to increase its worth in the eyes of investors?
It’s hard to get into valuation specifics because each situation is unique. That being said, I think it’s a little bit of blinding flash of the obvious. If you focus on your customers and you do a good job for them and you are in attractive markets where you’re growing with those customers, your business will be more valuable than it was the day before. It’s all about making sure you’re taking care of your customers and continuing to grow profitably. Those are the sorts of businesses that attract attention because they are very well run and they will fit well with any organization.