Canadian growth in U.S.

BB&T Uni-Select Canada growth

While attention of late has been focused on the recent acquisition of CSK by O'Reilly, we thought it would be worth taking a few moments to highlight yet another acquisition that, albeit smaller, still carries some importance. In an operating environment where high gas prices and declining miles driven have forced auto aftermarket participants to look deeper into their own businesses to maintain a competitive edge, it has also brought with it a heightened level of consolidation activity. The aftermarket should survive the turbulence and see annual growth in the 2 to 4 percent range return once the operating environment normalizes, yet the competition is intense and we continue to witness growth through consolidation — a trend that is here to stay.

An example of this was the announcement by Canada-based Uni-Select that it would once again be adding to its U.S. market share with the acquisition of the Mid-Atlantic operations of Parts-Depot, Inc. on August 14 (including nine regional parts distribution warehouses and 67 parts stores). While details on the terms of the acquisition including the purchase price have not been released, the transaction is expected to add approximately $180 million in annual sales to Uni-Select's U.S. operations. Parts-Depot will retain the operations of its Florida-based locations.

We don't think this will be the last acquisition that Uni-Select makes in the United States, and smaller parts distributors will now have to add the company to the list of competitors that are aggressively attacking the commercial parts segment. In fact, a majority of Uni-Select's growth is being derived from its U.S. expansion. It will take time for the company to digest all of these acquisitions and implement a single IT platform, so while the scale for Uni-Select is beginning to develop, the synergies may take time.

Uni-Select USA has generated a 35-percent compound annual revenue growth rate since 2000, with sales increasing from roughly $70 million to approximately $565 million in 2007, driven primarily by consolidation; in fact, this segment now represents over half of Uni-Select's total mix of business, a significant increase from the 18 percent of mix in 2000.

While its early years of U.S. expansion can be characterized by a series of smaller acquisitions, Uni-Select's November 2004 acquisition of Middle Atlantic Warehouse Distributor, Inc. really cemented the company's foray into the U.S. aftermarket — adding then-annual sales of roughly $350 million, operations in 18 states, 31 DCs, 145 corporate stores and a base of roughly 1,200 independents.

In 2005, Uni-Select USA made eight acquisitions worth roughly $40 million in annualized sales (including Motor Parts Warehouse, Inc. and Kunz Oil Company); in 2006, this segment made an additional 12 acquisitions for $66 million in annualized revenue (and included the likes of Auto Craft Automotive Products and Tier Parts Warehouse); and in 2007, the division made 11 acquisitions including that of Consumer Auto Parts, Parts Distributors and Thompson.

The U.S. commercial aftermarket is still a very fragmented market. The top seven U.S. commercial providers command just shy of 19 percent market share. The acquisition of Parts-Depot should move Uni-Select into the fifth spot in terms of commercial parts sales, behind Advance Auto (roughly $1.4 billion in revenue) and moving ahead of AutoZone ($730 million).

Moving forward, Uni-Select should become more aggressive with its efforts to consolidate larger regional players, although there is still ample opportunity to roll up smaller independents — particularly given the current backdrop of macroeconomic and industry specific headwinds — as top line growth remains the key driver behind expense leverage given the company's mature, high fixed-cost distribution model.

Could we at some point see a national footprint at Uni-Select? Possibly, but in the interim Uni-Select management should continue to look for bolt-on and tuck-in acquisition opportunities that complement and expand its presence in several key regions. Other key areas of focus could include continued efforts to expand import vehicle coverage, in addition to further inroads in the fleet servicing arena and potentially to more retail exposure.

BB&T Capital Markets is a full-service investment banking firm that focuses on specific industries, including the Automotive Aftermarket industry. BB&T Capital Markets is a division of Scott & Stringfellow, Inc., NYSE/SIPC. Scott & Stringfellow is a registered broker/dealer subsidiary of BB&T Corporation, the nation's 14th-largest financial holding company with $130.8 billion in assets.

Disclosures: BB&T Capital Markets makes a market in the securities of O'Reilly Automotive Inc.

BB&T Capital Markets has managed or co-managed a public offering of securities for AutoZone, Inc., in the last 12 months.

BB&T Capital Markets has received compensation for investment banking services from AutoZone, Inc., in the last 12 months.

BB&T Capital Markets expects to receive or intends to seek compensation for investment banking services from Advance Auto Parts, Inc.; AutoZone, Inc.; and O'Reilly Automotive Inc., in the next three months.

Advance Auto Parts, Inc., is, or during the past 12 months was, a client of BB&T Capital Markets, which provided non investment banking, securities-related services to, and received compensation from, the aforementioned company for such services. The analyst or employees of BB&T Capital Markets with the ability to influence the substance of this report knows the foregoing facts.

An affiliate of BB&T Capital Markets received compensation from Advance Auto Parts, Inc.; AutoZone, Inc.; and O'Reilly Automotive Inc. for products or services other than investment banking services during the past 12 months. The analyst or employees of BB&T Capital Markets with the ability to influence the substance of this report know or have reason to know the foregoing facts.