Advance Auto Parts Goes Big, Real Big, Shares Surge 16%

Investors really like Advance Auto Parts (AAP) deal to buy a chain of repair shops–so much so that a stock that finished yesterday in the low 80s is now trading in the mid-90s.

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Reuters has the details on the deal:

Advance Auto Parts Inc will buy 1,418 outlets of the Carquest chain to boost its auto repair operations to complement its car parts business, sending its shares up as much as 20 percent to a record high.

Advance Auto, which sells products such as batteries, air fresheners and engine parts, said it would buy General Parts International Inc for just over $2 billion, creating the largest North American retailer of auto parts.

General Parts is the biggest operator of the Carquest chain, which runs auto repair shops and car parts stores. General Parts also owns Worldpac, the No.1 supplier of replacement parts for imported car and truck brands.

Reuters notes that the finished product will be the largest supplier of auto parts by sales, just beating out Autozone (AZN).

Credit Suisse analyst Simeon Gutman and team call the deal a “smart strategic acquisition.” They write:

The acquisition would solve two important issues for AAP. First, it has struggled in the DIFM segment, primarily due to a weaker and less accessible distribution network. General Parts has one of the most established distribution networks in the country (~40 DCs vs. AAP’s 10) and long standing relationships with mechanics nationwide. More importantly, WORLDPAC (estimated $1 billion in sales) is the leader in foreign parts with AAP owning the number three player and we see synergies from AI flooding into WORLDPAC.

A meaningfully positive aspect of the transaction is targeted annual cost savings of roughly $160 million within three years (~6.1% of acquired sales). This seems relatively consistent with previous DIY Auto deals. The deal is expected to be 20%+ accretive to FY 14 cash EPS. Though there are always risks in realizing synergies, the high overlap between these businesses makes these estimates seem reasonable.

Even Standard & Poor’s has blessed the acquisition:

We are affirming all ratings on the company, including the ‘BBB-’ corporate credit rating.

The outlook is stable and incorporates our expectation that the company will use the vast majority of its excess cash flow in the two years subsequent of the acquisition to reduce debt. We also expect moderate profit growth at Advance’s legacy business, no material integration risk associated with the acquisition (given the similar businesses), and cost synergies that lead to material profit growth beginning in the near term.

Advance Auto Parts has gained 16% to $95.61, while Autozone has risen 0.8% to $423.49, O’Reilly Automotive (ORLY) has advanced 2% to $131.64 and Pep Boys (PBY) is up 1% at $12.50.