By Jeff Sanford
Toronto, Ontario -- March 1, 2016 -- LKQ has announced it will acquire Pittsburgh Glass Works (PGW) from private equity firm Kohlberg & Co. and PPG Industries, an acquisition that continues the company's recent diversification efforts. PGW is a major player in the auto glass manufacturing business.
The price of the purchase is a serious $635 million US. Nate Brochmann, an equity analyst with William Blair & Company, likes the deal. In a note distributed to clients he outlined the reasons for optimism, saying that LKQ's growth strategy for some time now has been focused on identifying acquisition targets with strong synergies.
“This is a continuation of the strategy witnessed as far back as LKQ's acquisition of Keystone to enter into the aftermarket parts distribution segment. Automotive aftermarket distribution is still rather inefficient globally, and LKQ is identifying segments where they can leverage their existing distribution network to streamline operations, strip out costs and generally leverage their economies of scale.”
The acquisition will also help the company diversify beyond its original core business of distributing recycled auto parts in North America, which is a stated goal of the company. LKQ was founded in 1998. That year it had revenues of just $31 million. Today revenues are $5 billion. But the company sees growth and diversification as important to preserving the growth. In its 2014 annual report, the company noted that one of the risks to its business is the potential reduction in car accidents that could follow on the arrival of connected car technology.
Recently LKQ announced it had bought the holding company of Rhiag-Inter Auto Parts Italia, a company that operates 247 distribution centres and 10 warehouses from which it sells used parts to customers in Italy, the Czech Republic, Switzerland and seven other European countries. The used auto parts distributor will spend $1.14 billion deal to boost its exposure to the European market through this acquisition.
“With this acquisition, we further solidify our leading market position in Europe and enhance our global diversification strategy,” Robert Wagman, President and CEO of LKQ, told analysts at the time.
Bradley Mewes is an analyst with Supplement, a company that specializes in collision repair consulting. According to Mewes this was a significant deal. LKQ is moving beyond its North American roots to become a truly global company.
“You have to look at what LKQ did in Europe. That's a huge acquisition for them. They are becoming the multinational of aftermarket parts,” said Mewes. “They’ve been very open in saying they see Europe as a huge growth opportunity.”
LKQ CEO Wagman delivered an address at a conference in Troy, Michigan recently, and gave a great overview of the companies growth in Europe. In 2011 the company had no revenue in Europe, but under Wagman’s leadership, the overseas diversification strategy now sees European operations representing more than 27 percent of LKQ’s revenue.
“Now we’re projected to do $1.4 billion,” said Wagman. He went on to note that LKQ is the number one supplier of parts in the United Kingdom and, in the spring of 2013, bought Sator Beheer BV, a leading distributor of auto parts, tools and equipment headquartered in Schiedam, the Netherlands, for approximately $268 million. The company has also launched a joint venture in Australia, where the company partnered with a leading insurer to develop alternative auto parts business there and in New Zealand. Overall, since 2012, LKQ has acquired 30 companies. Potential future markets, according to Wagman could include Russia, India, and China (where, by 2020, there will be more cars than there are in the US).
The company is also diversifying across sectors. In 2003 an insurance company recommended that LKQ began to provide collision repair facilities with original aftermarket parts, not just recycled parts.
“It was a game-changer for us,” Wagman reportedly said at the presentation. “They wanted to be able to say to a shop, ‘Here’s a pallet with everything you need.’ It was brilliant out-of-the-box thinking. They wanted us to be their delivery agent.”
Soon after, LKQ acquired Keystone Automotive Industries, the largest distributor of aftermarket parts in North America. This was a key acquisition for LKQ.
“We bet the company with that purchase,” Wagman reportedly said during his Flint presentation. Since then, LKQ entered the remanufactured engine business in 2010 with the purchase of two companies. The company has also entered the paint supply business by acquiring AkzoNobel Coatings’ US paint distribution business. Most recently, the company acquired PGW.
According to Brochmann's analysis of the deal PGW brings to LKQ, a “new manufacturing component to the business. PGW operates through roughly 120 distribution branches serving over 7,000 automotive glass retailer shops across North America. But the company also manufactures products, with 12 automotive glass fabrication facilities in North America, China, and Europe.
“It certainly fits with their strategy to diversify the business and expand into adjacent verticals,” said Mewes regarding the PGW deal. As headwinds from scrap steel prices and foreign exchange work to limit near-term results the diversification will help stock holders will by heartened by attempts to continue the growth.
The company's stock performance has been spectacular. The very strong and rapid growth has been reflected in a rising stock price. When LKQ went public in 2004 shares were originally offered for $13. There have been three share splits along the way. Taking those into account those original shares have grown to $270 in value. Remarkably growth by any measure. But the company knows how to thrive. During the Flint presentation Wagman explained how, after the economic crash of 2008, when OEMs were closing dealerships and distribution centres, LKQ realized a blossoming opportunity and increased inventory by 40 percent. “We knew the dealers were struggling to supply parts and we had explosive growth,” he said then.
Brochmann believes the five-year outlook on the company remains bright as a result of the diversification strategy. “LKQ's recent acquisitions of Rhiag and PGW (both expected to close in the second quarter) should help expand the company's market potential and provide nice cost synergies and cross-selling opportunities,” he said. “The underlying operating environment remains favorable in the United States with increased miles driven, more parts per car and a recent increase in the new car SAAR (seasonally adjusted annual rate – Ed.). In addition, we believe that LKQ can improve its profitability over time through its internal initiatives in North America and increased scale in Europe.”
For more information on LKQ, please visit lkqcorp.com.