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Why Private Equity Loves the Automotive Aftermarket


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Steady. Adaptable. Resilient. Recession-proof.

These are a few of the superlatives that association leaders and members of the trade press (guilty as charged!) often use to describe the automotive aftermarket. 

Sure, we may be biased. But we’re not the only ones drinking the proverbial Kool-Aid. Many of the same qualities that make the aftermarket a great place to do business also make it a tantalizing investment space for private equity.

In recent years, PE firms have been consummating deals at a steady clip. A few notable examples include Kohlberg & Co.’s majority-stake investment in Parts Authority in 2020; Hidden Harbor Capital Partners’ acquisition of Dayco in 2022; MidOcean Partners’ acquisition of Cloyes in 2022; and more recently, Kinderhook Industries’ acquisition of Auto-Wares in March.  

When MidOcean acquired Cloyes (from Hidden Harbor) in February 2022, it was MidOcean’s third investment in the automotive aftermarket in a span of 15 months. At the time, MidOcean Managing Director Daniel Penn said the firm “continue[s] to see significant tailwinds” in the aftermarket.

One could argue that those tailwinds are stronger than ever today.

One of the most frequently cited tailwinds is the growing and aging light-vehicle parc. In 2022, the average age of light vehicles in the United States hit an all-time high of 12.2 years, even as the vehicle parc climbed to 283 million passenger cars and light trucks, according to S&P Global Mobility. Meanwhile, the number of eight- to 11-year-old vehicles – the so-called “sweet spot” for the aftermarket – is expected to increase incrementally through 2026, according to the 2023 Mergers & Acquisitions Outlook Report from Stifel and MEMA Aftermarket Suppliers.

One lingering impact of the pandemic – the semiconductor shortage – has provided another boost to the aftermarket. Surging demand for consumer electronics at the height of the pandemic triggered (or some might say exacerbated) a global chip shortage. The supply crunch has taken its toll on new-vehicle production, making it harder for dealers to get their hands on new inventory. The scarcity of new vehicles has goosed prices for new and used cars, trucks and SUVs. As a result, many motorists have had little choice but to hold on to their existing vehicles as long as they can.

It all supports the narrative that the automotive aftermarket is a safe haven for investment – in good times and bad.   

“A lot of private-equity investors like it when there’s a stable, steady market,” explains Rick Schwartz, co-founder and managing partner of Schwartz Advisors. “Many people who haven’t dealt with private-equity firms misunderstand how PEs work. Most PEs that we deal with are interested in building businesses and creating jobs. When there’s a slow, steady, stable market, the question is, ‘Hey, if we buy a company – or even if we buy a collection of companies and roll them into one – can we somehow outpace the historical growth?’ Because if they can, that can make for a very attractive investment.”

Lightbulb Moment

Joe Sparacino, managing director, head of automotive aftermarket for Stifel, points to the Great Recession as a watershed moment when “lightbulbs went off in investors’ heads” that the automotive aftermarket was a great place to deploy their cash.

The Great Recession lasted from December 2007 to June 2009, according to the Federal Reserve, making it the longest – and deepest – recession since World War II. During the Great Recession, the unemployment rate more than doubled, and U.S. gross domestic product plummeted 4.3% from peak to trough.

Still, even with the economy in a tailspin, publicly traded parts retailers seemed to be doing just fine. O’Reilly Automotive, for example, reported a 42% year-over-year increase in full-year 2008 sales (and even scooped up specialty retailer CSK in a tough credit market). Full-year diluted earnings per share for AutoZone jumped nearly 18%, and the company announced several share buybacks in 2008.

Those examples of growth even in the most challenging economic conditions are among the reasons that the automotive aftermarket – hitherto lumped in with the rest of the auto industry – emerged as an attractive investment target for private equity.

“Consumers deferred purchasing new vehicles and therefore put more money into the vehicles they already had,” Sparacino says of the recession. “[Parts retailers] weren’t immune fully from the effects of the recession, but they did show stability through that period. And as the credit markets eased on the backside of the recession, private equity really took notice of the space, and you saw investments picking up a lot at that time.”

Checking All the Boxes

While the performance of the publicly traded parts retailers may have served as a proxy for the overall health of the aftermarket, investors discovered there was a lot to like when they peeled back the curtain.

One of the fundamental factors that PE investors consider is the total addressable market, or TAM. With a TAM pushing 300 million light-duty vehicles – and an aging one at that – the $1.8 trillion global aftermarket checks off an important box, says Schwartz. “There may be some industries where a private-equity investor may get excited about a specific business, but it’s not a really big market. How much can you grow it? The big VIO and the aging VIO make [the aftermarket] an attractive space.”

The aftermarket’s unique business landscape – its preponderance of small independents and mom-and-pop shops – only added to the allure. Mix in a long, favorable stretch of low interest rates, and it’s been a tantalizing cocktail for PE investors.

“You have a lot of family-owned businesses or privately held businesses where there isn’t necessarily a next generation,” Schwartz says. “That presents a good opportunity for the business owners to exit. There’s also an opportunity [for investors] to consolidate and get some scale and reduce some of the operating expenses.”

Sparacino adds: “It’s a very fragmented industry and there are clear benefits to scale. This dynamic has drawn private-equity investments in companies that can serve as platforms for consolidation.”

Collision Course

If any segment epitomizes the aftermarket’s favorable dynamics for PE investment, it’s collision repair.

Collision repair has been a bull market for consolidation, with a handful of players – Caliber Collision, Boyd Group and Service King – leading the initial charge. “During the beginning years, the initial consolidators were working on designing and creating the modeling that we’ve watched evolve into what it is today: a large platform of corporate-owned collision centers offering nationwide service,” Laura Gay explains

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She adds: “Independent shops – both single and small multi-shop owners (MSOs) – sell right and left for many reasons, including COVID, financials, stress, staffing challenges, remaining profitable in the face of inflation and natural attrition.”

The M&A frenzy in collision repair has taken some dramatic twists and turns in recent years.

Service King, for example, was on the brink of bankruptcy before Clearlake Capital Group acquired the company in 2022 and simultaneously merged it with Crash Champions, creating an auto body conglomerate that boasts more than 550 locations in 35 states and the District of Columbia. In 2019, Hellman & Friedman acquired Caliber Collision and merged it with ABRA (which the PE firm had owned since 2014), creating the largest auto body MSO in the industry.

The consolidation is expected to continue, and some newer PE-backed players are emerging. For example, since New Mountain Capital acquired Classic Collision in 2020, the Atlanta-based MSO has expanded from 34 locations to more than 200 today. Meanwhile, TSG Consumer Partners acquired Joe Hudson’s Collision Centers in 2019, and the auto body chain has grown from 110 to 157 locations since the deal, according to the 2023 Mergers & Acquisitions Outlook Report.    

“M&A activity from these [newer] platforms is expected to continue, and mergers among two or more of these entities is possible,” the report concludes.

Private equity has taken quite a shine to the carwash segment as well. Some recent deals include Atlantic Street Capital’s acquisition of Express Zips Car Wash in 2020; Golden Gate Capital’s acquisition of Tidal Wave Auto Spa in 2021; and Percheron Capital’s acquisition of Caliber Car Wash in late 2021.

“High fragmentation, strong cash flows, acquisition-multiple arbitrage and advancements in automation are among the many characteristics that make private-equity investment in the carwash sector increasingly attractive,” the Stifel/MEMA report explains. “Since the beginning of 2020, over a dozen private-equity-backed platforms have emerged, with every platform nearly doubling or tripling total site count since initial investment.”

Looking Ahead

With so many tailwinds and so many favorable dynamics, the automotive aftermarket likely will continue to be a compelling investment target for private equity. Sparacino and Schwartz expect segments such as collision repair, carwash and general repair/service – especially tire – to stay hot. Schwartz also believes that the heavy-duty market is starting to percolate.

The steady stream of PE investment  certainly is a testament to the health and vitality of the automotive aftermarket. But it’s fair to ask: Is private equity a good thing for the aftermarket?

Sparacino and Schwartz believe it is. “The private-equity investors leading consolidations are growth-oriented,” Sparacino says. “They’re looking to back high-quality businesses in partnership with proven management teams to build even better companies.” When PE firms partner with strong businesses and leverage their financial resources and strategic expertise,

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      O’REILLY AUTOMOTIVE, INC. AND SUBSIDIARIES
      CONDENSED CONSOLIDATED BALANCE SHEETS
      (In thousands, except share data)                         March 31, 2024   March 31, 2023   December 31, 2023        (Unaudited)      (Unaudited)      (Note) Assets                   Current assets:                   Cash and cash equivalents   $ 89,264     $ 59,872     $ 279,132   Accounts receivable, net     437,821       346,037       375,049   Amounts receivable from suppliers     139,267       128,758       140,443   Inventory     4,805,164       4,543,980       4,658,367   Other current assets     128,181       109,347       105,311   Total current assets     5,599,697       5,187,994       5,558,302                       Property and equipment, at cost     8,555,556       7,649,066       8,312,367   Less: accumulated depreciation and amortization     3,360,351       3,090,010       3,275,387   Net property and equipment     5,195,205       4,559,056       5,036,980                       Operating lease, right-of-use assets     2,227,783       2,166,646       2,200,554   Goodwill     1,009,857       892,094       897,696   Other assets, net     180,512       167,026       179,463   Total assets   $ 14,213,054     $ 12,972,816     $ 13,872,995                       Liabilities and shareholders’ deficit                   Current liabilities:                   Accounts payable   $ 6,117,068     $ 6,055,992     $ 6,091,700   Self-insurance reserves     130,974       136,723       128,548   Accrued payroll     127,704       111,324       138,122   Accrued benefits and withholdings     174,125       132,022       174,650   Income taxes payable     147,645       117,790       7,860   Current portion of operating lease liabilities     399,245       375,451       389,536   Other current liabilities     791,633       427,006       730,937   Total current liabilities     7,888,394       7,356,308       7,661,353                       Long-term debt     5,288,632       4,927,678       5,570,125   Operating lease liabilities, less current portion     1,900,200       1,854,533       1,881,344   Deferred income taxes     321,323       249,903       295,471   Other liabilities     205,703       209,411       203,980                       Shareholders’ equity (deficit):                   Common stock, $0.01 par value:                   Authorized shares – 245,000,000                   Issued and outstanding shares –                   58,982,123 as of March 31, 2024, and                   61,038,936 as of March 31, 2023, and                   59,072,792 as of December 31, 2023     590       610       591   Additional paid-in capital     1,410,756       1,305,276       1,352,275   Retained deficit     (2,849,108 )     (2,952,797 )     (3,131,532 ) Accumulated other comprehensive income     46,564       21,894       39,388   Total shareholders’ deficit     (1,391,198 )     (1,625,017 )     (1,739,278 )                     Total liabilities and shareholders’ deficit   $ 14,213,054     $ 12,972,816     $ 13,872,995     Note: The balance sheet at December 31, 2023, has been derived from the audited consolidated financial statements at that date but does not include all of the information and footnotes required by United States generally accepted accounting principles for complete financial statements.
       
      O’REILLY AUTOMOTIVE, INC. AND SUBSIDIARIES
      CONDENSED CONSOLIDATED STATEMENTS OF INCOME
      (In thousands, except per share data)                   For the Three Months Ended     March 31,         2024      2023 Sales   $ 3,976,240     $ 3,707,864   Cost of goods sold, including warehouse and distribution expenses     1,942,068       1,817,535   Gross profit     2,034,172       1,890,329                 Selling, general and administrative expenses     1,281,691       1,173,684   Operating income     752,481       716,645                 Other income (expense):             Interest expense     (57,148 )     (44,572 ) Interest income     1,656       868   Other, net     3,401       4,479   Total other expense     (52,091 )     (39,225 )               Income before income taxes     700,390       677,420   Provision for income taxes     153,152       160,535   Net income   $ 547,238     $ 516,885                 Earnings per share-basic:             Earnings per share   $ 9.27     $ 8.36   Weighted-average common shares outstanding – basic     59,017       61,840                 Earnings per share-assuming dilution:             Earnings per share   $ 9.20     $ 8.28   Weighted-average common shares outstanding – assuming dilution     59,454       62,398                      
      O’REILLY AUTOMOTIVE, INC. AND SUBSIDIARIES
      CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
      (In thousands)                   For the Three Months Ended     March 31,      2024   2023 Operating activities:             Net income   $ 547,238     $ 516,885   Adjustments to reconcile net income to net cash provided by operating activities:             Depreciation and amortization of property, equipment and intangibles     109,648       93,747   Amortization of debt discount and issuance costs     1,593       1,215   Deferred income taxes     2,374       3,393   Share-based compensation programs     7,022       7,435   Other     2,997       29   Changes in operating assets and liabilities:             Accounts receivable     (36,954 )     (2,610 ) Inventory     (92,042 )     (179,481 ) Accounts payable     6,107       172,701   Income taxes payable     140,025       145,441   Other     16,207       (44,991 ) Net cash provided by operating activities     704,215       713,764                 Investing activities:             Purchases of property and equipment     (249,240 )     (223,268 ) Proceeds from sale of property and equipment     3,853       2,704   Other, including acquisitions, net of cash acquired     (155,366 )     (956 ) Net cash used in investing activities     (400,753 )     (221,520 )               Financing activities:             Proceeds from borrowings on revolving credit facility     30,000       1,216,000   Payments on revolving credit facility     —       (661,000 ) Net payments of commercial paper     (310,805 )     —   Repurchases of common stock     (270,019 )     (1,111,461 ) Net proceeds from issuance of common stock     57,815       15,146   Other     (569 )     (354 ) Net cash used in financing activities     (493,578 )     (541,669 )               Effect of exchange rate changes on cash     248       714   Net decrease in cash and cash equivalents     (189,868 )     (48,711 ) Cash and cash equivalents at beginning of the period     279,132       108,583   Cash and cash equivalents at end of the period   $ 89,264     $ 59,872                 Supplemental disclosures of cash flow information:             Income taxes paid   $ 9,798     $ 9,696   Interest paid, net of capitalized interest     34,671       26,531                      
      O’REILLY AUTOMOTIVE, INC. AND SUBSIDIARIES
      SELECTED FINANCIAL INFORMATION
      (Unaudited)                     For the Twelve Months Ended     March 31,  Adjusted Debt to EBITDAR:   2024   2023 (In thousands, except adjusted debt to EBITDAR ratio)             GAAP debt   $ 5,288,632   $ 4,927,678 Add: Letters of credit     137,848     116,688   Unamortized discount and debt issuance costs     28,368     27,322   Six-times rent expense     2,587,056     2,404,986 Adjusted debt   $ 8,041,904   $ 7,476,674               GAAP net income   $ 2,376,934   $ 2,207,655 Add: Interest expense     214,244     167,451   Provision for income taxes     650,786     635,159   Depreciation and amortization     424,962     368,757   Share-based compensation expense     27,098     27,360   Rent expense (i)     431,176     400,831 EBITDAR   $ 4,125,200   $ 3,807,213               Adjusted debt to EBITDAR     1.95     1.96    
      (i) The table below outlines the calculation of Rent expense and reconciles Rent expense to Total lease cost, per ASC 842, the most directly comparable GAAP financial measure, for the twelve months ended March 31, 2024 and 2023 (in thousands):   
                          For the Twelve Months Ended     March 31,     2024   2023 Total lease cost, per ASC 842   $ 510,208   $ 476,439 Less: Variable non-contract operating lease components, related to property taxes and insurance     79,032     75,608 Rent expense   $ 431,176   $ 400,831  
                            March 31,      2024   2023 Selected Balance Sheet Ratios:                 Inventory turnover (1)     1.7       1.7   Average inventory per store (in thousands) (2)   $ 773     $ 754   Accounts payable to inventory (3)     127.3 %     133.3 %  
                            For the Three Months Ended       March 31,        2024   2023 Reconciliation of Free Cash Flow (in thousands):             Net cash provided by operating activities   $ 704,215   $ 713,764 Less: Capital expenditures     249,240     223,268   Excess tax benefit from share-based compensation payments     16,120     4,378 Free cash flow   $ 438,855   $ 486,118  
                        For the Three Months Ended     March 31,         2024   2023 Revenue Disaggregation (in thousands):           Sales to do-it-yourself customers $ 2,001,986   $ 1,918,467 Sales to professional service provider customers     1,869,740     1,711,964 Other sales, sales adjustments, and sales from the acquired Vast Auto stores     104,514     77,433 Total sales   $ 3,976,240   $ 3,707,864  
                            For the Three Months Ended   For the Twelve Months Ended     March 31,    March 31,         2024   2023      2024   2023 Store Count:                 Beginning domestic store count   6,095   5,929     5,986     5,811   New stores opened   36   59     146     179   Stores closed   —   (2 )   (1 )   (4 ) Ending domestic store count   6,131   5,986     6,131     5,986                     Beginning Mexico store count   62   42     43     27   New stores opened   1   1     20     16   Ending Mexico store count   63   43     63     43                     Beginning Canada store count   —   —     —     —   Stores acquired   23   —     23     —   Ending Canada store count   23   —     23     —                     Total ending store count   6,217   6,029     6,217     6,029    
                                    For the Three Months Ended   For the Twelve Months Ended     March 31,    March 31,         2024   2023   2024   2023 Store and Team Member Information:                         Total employment     90,601     89,125             Square footage (in thousands) (4)     47,143     45,117             Sales per weighted-average square foot (4)(5)   $ 82.59   $ 81.09   $ 341.62   $ 328.29 Sales per weighted-average store (in thousands) (4)(6)   $ 634   $ 611   $ 2,601   $ 2,467  
      (1) Calculated as cost of goods sold for the last 12 months divided by average inventory. Average inventory is calculated as the average of inventory for the trailing four quarters used in determining the denominator. (2) Calculated as inventory divided by store count at the end of the reported period. (3) Calculated as accounts payable divided by inventory. (4) Represents O’Reilly’s U.S. and Puerto Rico operations only. (5) Calculated as sales less jobber sales, divided by weighted-average square footage. Weighted-average square footage is determined by weighting store square footage based on the approximate dates of store openings, acquisitions, expansions, or closures. (6) Calculated as sales less jobber sales, divided by weighted-average stores. Weighted-average stores is determined by weighting stores based on their approximate dates of openings, acquisitions, or closures.  
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