On October 1, LKQ acquired Euro Car Parts (ECP), the largest distributor of automotive aftermarket parts in the United Kingdom, which generated $420 million in revenue in 2010. The company operates 89 branch locations throughout the UK, including 8 regional hubs, and a 500,000 square-foot national distribution center. ECP’s business model is somewhat different from LKQ’s core operations in North America in that ECP derives the vast majority (approximately 90 percent) of its sales from mechanical repair items, while in North America LKQ is primarily focused on the distribution of collision repair products.
LKQ paid $347 million for ECP that is subject to an additional $85 million earn-out upon the attainment of certain EBITDA (Earnings before interest, taxes, depreciation and amortization) growth targets in 2012 and 2013. The acquisition was funded through a drawdown of LKQ’s amended credit facility (total facility increased by $400 million to $1.4 billion, covenants and pricing terms are unchanged). While this assumption of debt does increase the company’s leverage profile, we expect LKQ to end Fiscal Year 2012 (FY’12) at a very reasonable level of 1.5 times net debt/EBITDA. Management expects the acquisition to be accretive to FY’12 EPS by $0.15-$0.18, and we raised our FY’12 earnings per share (EPS) estimate to $1.80 (from $1.64). ECP should contribute $120-$125 million in revenue to Fourth Quarter 2011 results, and we are incorporating, albeit conservatively, $520 million in incremental revenue to our prior FY’12 forecast, which represents approximately 16.5 percent growth from our prior FY’11 sales forecast.
This acquisition is more about the growth potential and opportunity to broaden aftermarket parts utilization in the UK than it is one centered around cost synergies. While the company does expect to realize savings from procurement, tax, treasury, back-office, etc, these are already largely factored into management’s expectations for $0.15-$0.18 in EPS accretion in FY’12. Over the longer term, we believe that significant opportunity exists for LKQ to capitalize on higher rates of alternative parts utilization in the U.K. OEM parts currently dominate the U.K’s $2-$3 billion collision part market, with alternative parts representing less than 10 percent of the installed part base. While the OEMs and their dealer networks have historically played a much larger role in the European aftermarket than in the United States, U.K. insurers face similar pressures as their U.S. counterparts to lower claims costs and offer more competitive policy options.
Management believes that market players are growing increasingly receptive to the use of aftermarket parts in the collision repair process and sees substantial opportunity in broadening the breadth and depth of ECP’s current product offerings. In addition, we believe that the acquisition of ECP can still be a meaningful contributor to top and bottom line growth at LKQ even if utilization rates in the U.K. for aftermarket collision parts do not increase meaningfully over time. ECP generated on average 30 percent organic revenue growth from 2005-2010, and the company is very well equipped for further market expansion given its advanced eCommerce platform, scalable IT systems and national branch system that is supported by multiple replenishment deliveries each day. And with just a low-single digit share of the traditional U.K. replacement auto parts market, we believe that ECP can easily double in size over time with LKQ expecting to greenfield 10-12 new branches annually for the next few years.
While we expect some bumps along the way as LKQ digests its first (and somewhat large) European acquisition, LKQ has an excellent track record of successfully integrating acquired businesses. And for an estimated approximate 7.0 times on an EV (Enterprise Value)/EBITDA basis, we believe that LKQ paid a very reasonable takeout multiple for a leading auto parts distributor with a consistent track record of double digit organic growth and see substantial long-term value in the acquisition of ECP.
About BB&T Capital Markets:
BB&T Capital Markets is a full-service investment banking firm that focuses on specific industries, including the Automotive Aftermarket. BB&T Capital Markets is a division of Scott & Stringfellow, LLC, member NYSE/FINRA/SIPC. Scott & Stringfellow is a wholly-owned nonbank subsidiary of BB&T Corporation, one of the nation’s largest financial holding companies with $155 billion in assets. Securities and insurance products or annuities sold, offered or recommended by Scott & Stringfellow are not a deposit, not FDIC insured, not guaranteed by a bank, not insured by any federal agency and may lose value.
BB&T Capital Markets makes a market in the securities of LKQ.
BB&T Capital Markets expects to receive or intends to seek compensation for investment banking services from LKQ Corporation in the next three months.
An affiliate of BB&T Capital Markets received compensation from LKQ Corporation 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.