O'Reilly's acquisition of CSK opens up West Coast DIFM market

O'Reilly Automotive, Inc.'s purchase of CSK Auto Corporation continues the automotive aftermarket industry's trend of consolidation and makes the combined company the third largest national auto parts retailer in the country. But more importantly, the acquisition has allowed O'Reilly's to gain a ready-made entry point into the West Coast market, says Graham Payne, managing director of Capstone Financial Services.

"This is a real coup for O'Reilly's," Payne told Aftermarket Business magazine during an exclusive interview. "It's going to allow them to expand rapidly into markets they've never been in, and will make the company more of a national player within the DIFM segment."

The two companies have signed a definitive merger agreement under which O'Reilly will acquire all of the outstanding shares of CSK common stock pursuant to an exchange offer, in a transaction valued at approximately $1.0 billion, including approximately $500 million of debt. The boards of directors of both companies have approved the transaction.

"Today is an exciting day for both O'Reilly and CSK shareholders," says Greg Henslee, O'Reilly's automotive chief executive officer. "As a combined company, we will be even stronger and more competitive, with the ability to better meet the continuing evolution of the automotive aftermarket industry. Additionally, we are creating a company that will generate significant value for the combined companies' shareholders, growth opportunities for team members and enhanced service to our customers."

Although the transaction is still in the very early stages, Mark Merz, a senior accountant with O'Reilly and a member of the company's investor relations team, says that everyone is excited about the possibilities this merger will bring.

"This move opens up the entire West Coast for us," he says. "We're excited about expanding our DIFM operations and employing our dual-market strategy within the new stores. We see a lot of outside potential resulting from this transaction."

The CSK acquisition will boost O'Reilly's revenue by 32 percent. According to Merz, the combined revenue for the two companies (which was calculated by using a 2007 Proforma filing from each company) now totals $4.4 billion. In addition, the acquisition will increase O'Reilly's nationwide store count from 1830 to 3200, almost doubling its geographic footprint overnight.

Merz says that at this point in time, the company hasn't put any solid plans in place or determined what will happen to the newly acquired CSK stores. Historically speaking, however, the company has transferred its acquisitions over to the O'Reilly name. Merz says that there is a very strong possibility that this will occur with the CSK stores, too.

"Of course, nothing can be done until we complete the necessary SEC regulatory findings and all other closing procedures," continues Merz. "But once that is done, we'll be able to move forward with our integration plan."

Under the terms of the agreement, CSK shareholders will receive $11.00 of O'Reilly common stock, subject to a collar, plus $1.00 in cash for each share of CSK common stock. This is a 20 percent increase in share price, compared to the price of CSK stock before the merger, Payne adds.

"The benefits of this transaction are very compelling," adds Larry Mondry, CSK Auto's president and chief executive officer. "After careful consideration of a number of viable alternatives, our board has determined that partnering with O'Reilly is clearly the best course of action for our shareholders. As part of a stronger, more financially flexible company, shareholders, creditors and suppliers will have a meaningful opportunity to participate in the development of a company that will be well positioned to be a nationwide leader in the automotive aftermarket industry. Equally important, this transaction provides growth and advancement opportunities for CSK's team members."

But while the transaction clearly stands to benefit CSK shareholders, O'Reilly will no doubt come out on top in the end.

"More than anything else, this transaction means that there's another player in the DIFM market, particularly on the West Coast," Payne says. "And while that's not great news for AutoZone or Advance Auto Parts, it's going to be great for O'Reilly's. This just proves, once again, that if you have to choose one category to pursue right now, DIFM makes more sense in terms of economics and the market segment's growth potential."

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