Itochu Buys Kwik-Fit for £637 million

Kwik-Fit has reportedly been sold to the Japanese conglomerate that owns Stapleton’s, Itochu Corporation. According to a City AM report, the deal follows the signing of a three digit million pound deal yesterday (1 March 2011). The article suggests Kwik-fit’s former owner, private equity firm PAI Partners” has “cashed out” of its six-year ownership of the chain for “£637 million, which includes net debts of £457 million.” A Kwik-Fit spokesman refused to confirm or deny the reports when Tyres & Accessories asked for confirmation of the news. Either way, the reports suggest the deal is still subject to regulatory approval.

Kwik-Fit has reportedly been sold to the Japanese conglomerate that owns Stapleton’s, Itochu Corporation. According to a City AM report, the deal follows the signing of a three digit million pound deal yesterday (1 March 2011). The article suggests Kwik-fit’s former owner, private equity firm PAI Partners” has “cashed out” of its six-year ownership of the chain for “£637 million, which includes net debts of £457 million.” A Kwik-Fit spokesman refused to confirm or deny the reports when Tyres & Accessories asked for confirmation of the news. Either way, the reports suggest the deal is still subject to regulatory approval in any case.

If confirmed, the latest price tag would appear to be something of a bargain for Itochu. PAI bought Kwik-Fit, which included a collection of businesses such as Kwik-Fit insurance which has subsequently been sold, for £800 million in 2005. At the peak of the company’s value (in 1999) previous owners Ford paid £1 billion to company founder Sir Tom Farmer. The sale reportedly follows a bidding process that began in December 2010, however there has been talk of sale since September 2008.

The press have contributed two false starts to the discussion since the rumour mill started more than two years ago. Then the speculation related to the sale of the company’s German retail operations – rather than the sale of the whole company as it had appeared. At the end of May 2009, the Kwik Fit Group sold Pit Stop, the German business, to BluO International Affiliates, a German private equity investor. The deal followed worse than expected performance from the company’s tyre retail business in the country. In 2007 Pit Stop set itself the goal of expanding its network from 400 to 750 outlets, however by the time of the sale the chain only totalled 408 depots. Bluo has a reputation for investing in restoration and reportedly aims at a nominal purchase prices.

The second sale false start, so to speak, came in June last year when the media published reports suggesting Kwik-Fit was to be sold for the low-ball price of just £250 million. However, it turned out that this actually referred to the sale of its insurance wing, which eventually went for £215 million in July 2010. Without knowing the exact details of the Pit-Stop sale it is difficult to know what the combined value of the two sales was and therefore how to gauge the price Itochu looks to have paid for the company. However, when you add together the £637 million figure quoted and £215 million raised by the sale of the insurance business, plus the a potentially nominal income from selling Pit Stop at first glance it looks like PAI has raised around £50 million more than the £800 million it paid for the company in 2005. But then there are the debts of £457 million.

Kwik-Fit’s sales of 5 – 6 million tyres a year currently account for around 20 per cent of UK replacement tyre market sales. The company employs 4,602 people nationally across over 676 branches. It reportedly has a further 545 branches across Europe, apparently making it the most widespread tyre services company on the continent.

What would this mean for Stapleton’s?

The first question Tyres & Accessories asked when the news broke was – what does this mean for leading wholesaler and growing tyre retail business Stapleton’s, which is owned by Itochu. A Japanese decision to buy Kwik-Fit would catapult the company into an overwhelmingly leading position in the market if all the businesses are taken as a group. But it would also raise a number of practical questions.

Stapleton’s, which reported sales in excess of £300 million in 2010, has been growing quickly in recent years, both organically and by strategic acquisition. Tyres & Accessories understands the company has just bought into the North Eastern part of England with the acquisition of the one of the leading wholesalers and retailers in that area. However when you add in the 100 branches Stapleton’s had before this deal and the 676 locations that Kwik-Fit reportedly brings, you can’t help wondering if nearly 800 branches is too much. And this in turn would suggest that some kind of attrition would be on the cards.

Then there is the wholesale side. Stapleton’s has recently invested heavily in a top notch warehousing facility in Birmingham and has other sites across the country. The purchase of the North Eastern business along with an earlier acquisition of CPK would suggest the firm already has enough warehousing capacity, so what would a combined company do with Kwik-Fit’s all-singing-all-dancing national distribution centre in Corby?

Industry observers described the reported Kwik-Fit deals as “a rare case of Japanese capital snapping up a UK-based retailer, although it fits naturally within the group’s portfolio, which also includes Stapleton’s Tyre Services.”  And the wording here could perhaps provide an answer. City AM’s journalist wrote that Kwik-Fit would make a great part of Itochu’s portfolio, but that doesn’t necessary mean that post-purchase the two businesses would be merged. Bearing in mind the characteristic long-termism of Japanese business, it is unlikely that they won’t have considered this in the medium to long term, but who says they won’t run them as parallel businesses?