Services Spotlight: Market Analysis

M&A research in the world of COVID-19

There are many factors and influences within the automotive aftermarket, including some that were unimagined until recently. Given the dynamic and unpredictable events of 2020, how can we determine the future of the automotive aftermarket?

For the purposes of market analysis, we use historic data from similar times in the past, blended with the unique changes in our current environment to get a perspective for the future of our industry. We have seen and recovered from slow-downs in the past and will do so again this time.

The light duty automotive aftermarket is a very stable market with long-term positive trends. Simply put, parts and services are sold when vehicles are used. After the Great Recession vehicle miles increased at about 1.3% per year (CAGR) from 2011-2019 and sales closely matched the mileage trend.

What was the Covid-19 impact? From early March 2020 to mid-April, miles driven dropped 57%. By May 1st mileage had started to increase but was still down 44%. (1)

The predominant mode of travel in the United States is by automobile and light truck, accounting for about 69% of passenger miles traveled in 2018. Driving to and from work represents 30% of light vehicle miles driven. Other top uses include work related travel, visiting friends and relatives and driving to school, daycare and church. (2)(3) Vehicle use obviously drives maintenance, parts consumption, and even collision and repair. As people have begun, although slowly to resume their normal activities, miles driven will continue to increase and the aftermarket will rebound.

The market is indeed dynamic. When large numbers of people stayed at home and did not drive, the miles driven dropped significantly. While more people have returned to their workplaces, the lingering work-from-home impact will likely affect the aftermarket to some degree. The variables that determine the durability of the work-from-home trend are complex and largely unknown at this point. At the time of writing, the impact of widespread home offices on productivity, morale, and profitability are not known.

The long-term work-from-home trend is also a study in human behavior. Densely populated cities, with often fewer miles driven per capita are seeing an exodus to the suburbs and less dense, and less expensive areas were cars are a necessity and mobility and pandemic restrictions are reduced. With no relevant data in our history, the viability of work-from-home and its widespread impact remains speculative.

There are always opportunities. Some companies are more aggressive in finding or making the opportunities necessary for profitable sales. Other companies may just be in the right place at the right time with their offering. In some cases, consolidation can be a savvy option to achieve profitability in a challenging market by reducing operating expenses, inventory, equipment, and facilities.

Like most business activity, M&A slowed in Q2 as investors evaluated their current holdings and developed short and long-term plans to move forward. Now, some investors are beginning to look for troubled businesses. Others are cautiously resuming searches for appropriate bolt-ons to current investments as well as strong platforms based on solid historic performance and future market potential.

M&A in the automotive aftermarket is moving forward. Activity and interest from investors and companies looking for opportunities that match their criteria is increasing. Investors believe in the long-term stability of our market and its long-term growth potential, backed by historic data and performance. Selecting the right opportunities is a key to success.

HMA’s extensive automotive market experience allows us to find the right opportunities for our clients, both buyers and sellers. We do extensive and transparent research rooted in our wide network of contacts and resources developed over decades in the industry. HMA delivers a significant level of detail in acquisition searches that are tailored to each client’s needs.

John Nodson
Vice President, Research
Hart Marx Advisors
jhnodson@hartmarxadvisors.com

(1) Source: Auto Care Association Factbook 2021, Jefferies Group, Arity, Municipal Open Data Portals, TomTom, GTCOM, AutoNavi
(2) U.S. Department of Transportation (DOT), Federal Highway Administration (FHWA) (2019) Highway Statistics 2018 (details)
(3) Center for Sustainable Systems, University of Michigan 2019. Personal Transportation Factsheet Pub. No. CSS01-07

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Minority Ownership Investor

Looking for Minority Ownership Investment Opportunities In Automotive Aftermarket

We have a client interested in making a minority ownership investment in the aftermarket. They are looking for targets with a strong management team and a vision to triple sales in five years if they have the backing of a significant and dedicated investor for organic and inorganic growth.

Acquisition Target Profile

  • Interested in a 20-80% ownership position, $20 to $100 million in equity investment.
  • US or Canadian ownership.
  • $40 to $500 million in current sales with high EBITDA margins.
  • Strong management team – or an outside manager with a strong track record of success. Must have equity in the business or willing to buy into the business.
  • Focus on automotive aftermarket, no or very limited OE. Some sales in other markets are acceptable, such as agriculture, industrial, marine, etc.
  • Manufacturers preferred, US or Canada manufacturing locations.
  • If a distributor, MUST have a value-added component.
  • If retail – stores or online consumer sales – probably not interested unless a VERY compelling/unique business.
  • DIFM service businesses will be considered.
  • Recurrent sales, products that are used and reordered.
  • Diversified customer base, not dependent on a few very large customers.

For more information, contact Tom Marx at 415-462-1805 or email tmarx@hartmarxadvisors.com.

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DISTRIBUTION & LIGHT MANUFACTURING

SMALL TO MID CAP – AUTOMOTIVE AFTERMARKET SPECIALTY DISTRIBUTION COMPANY WITH LIGHT MANUFACTURING

Acquisition Target Profile

  • Timing is immediate and continuous
  • Sales Revenue in the $5-250M range
  • EBITDA of $1M or greater
  • General categories of acquisition candidates are identified as companies that manufacture and/or distribute lubes, greases, oils, adhesives and sealants, diesel and gas additives, as well as specialty and limited hard parts
  • Acquirer prefers 100% buyout but would be willing to look other options that fit their business model
  • Executive management team desired, however operations management team required
  • Prefer fit with core distribution capabilities to include specialty products that fit alongside company’s current product portfolio with little to no OEM (OE Service business OK)
  • Light manufacturing targets should enhance current portfolio (mainly chemicals) and generate strong cash flow with minimal capital requirements
  • Looking for geographic expansion in large, underpenetrated markets such as Los Angeles, Atlanta, Denver, Chicago, and Pacific Northwest
  • Prefer company with headquarters in US with primarily domestic US business
  • All cash at closing
  • May stay in current facilities or relocate

For more information, contact Tom Marx at 415-601-1787 or email tmarx@hartmarxadvisors.com.

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CHEMICAL MANUFACTURER

SMALL TO MID CAP – CHEMICAL MANUFACTURING COMPANY

Acquisition Target Profile

  • Timing is immediate and continuous
  • Sales Revenue in the $10-250M range
  • EBITDA of $1M or greater
  • Acquisition candidates are domestic and international industrial MRO chemical (chemical or chemical formulations) product line companies that could be absorbed into acquirer’s global distribution network. Branded packaged goods preferred, although some bulk sales are OK
  • Acquirer looks to strengthen products or markets with related products in complementary categories
  • Acquirer prefers 100% buyout but would be willing to look other options that fit their business model
  • Product line carve out from larger entity will be considered as long as stand-alone financials meet minimum criteria above
  • Executive management team preferred but not required. Strong operations team in place a requirement
  • All cash at closing
  • May stay in current facilities or relocate

For more information, contact Tom Marx at 415-601-1787 or email tmarx@hartmarxadvisors.com.

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