Genuine Parts Deal Priced Favorably
The purchase of Alliance Automotive will make the narrow-moat firm a more valuable partner to global part vendors that should increasingly depend on the firm for aftermarket sales.
We anticipate a mid- to high-single-digit percentage increase for our $94 valuation for narrow-moat Genuine Parts (GPC) after it announced plans to acquire Alliance Automotive Group for about $2 billion in cash. We view the deal favorably, including the price (roughly 1.2 times Alliance’s $1.7 billion in 2017 revenue or 10 times synergy-adjusted EBITDA) and the procurement leverage that should ensue.
Our long-term outlook, calling for mid-single-digit top-line growth and high-single-digit adjusted operating margins on average over the next decade, should not change significantly after we incorporate Alliance, whose revenue and adjusted EBITDA are approximately 10% and 15% of the combined firm's pro forma marks.
We believe the purchase should boost Genuine Parts' competitive standing by making it a more valuable partner to global part vendors that should increasingly depend on the firm for aftermarket sales. While vehicle makes and models vary, shared components and suppliers create opportunities to leverage the combined entity’s buying power. While improvement is not significant enough to raise our narrow moat (in part due to the deal’s size; automotive constituted 53% of overall sales in fiscal 2016, versus about 57% pro forma), the purchase does fortify our conviction in Genuine Part's advantages.
Alliance is the top French distributor and the second-largest in the U.K., with 32% and 13% respective market share. While it is the third-largest in Germany, it has a 3% share. We believe future purchases in that fragmented market are likely (as well as other European markets; for example, Alliance is already buying a majority stake in a Polish distributor). European market dynamics are favorable; the professional segment dominates, and we believe worldwide trends toward more complex but more reliable vehicles (with longer service lives) will play to Genuine Parts' professional segment strength, leading to organic growth with the combined entity acting as a consolidator.
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Zain Akbari does not own (actual or beneficial) shares in any of the securities mentioned above. Find out about Morningstar’s editorial policies.
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