William Blair in favour of a Euro Car Parts rescue of Unipart Automotive
Investment bank William Blair said it views a potential rescue deal between Euro Car Parts and Unipart Automotive, if it were to happen, as “a good fit”. However, these words were written in an investor’s note dated 10 July and so far there hasn’t been any more information on how the talks with Euro Car Parts, Better Capital and at least one other party are progressing as yet.
Nevertheless reading the words from William Blair adds credence to the suggestion that Euro Car Parts (ECP), which is itself owned by US-based LKQ – a company William Blair invests in – may buy Unipart Automotive “would not be significant to LKQ’s total revenue, but the firm believes it would be slightly accretive to earnings and present scale benefits and cross-selling opportunities in the UK.” The implication is that it would be a positive move and the bank maintained its “outperform” rating on LKQ Corp shares in response to the news.
When LKQ bought ECP in 2011, the initial purchase price was £225 million ($347 million). In addition, the purchase agreement provides that the price could increase by up to £55 million ($85 million) if Euro Car Parts meets “certain growth targets” in 2012 and 2013. The payments related to the growth targets would be payable in 2013 and 2014. But expansion momentum has continued apace since then.
As recently as November 2013, Euro Car Parts founder Sukpal Singh told CAT magazine: “My vision is to develop a group of European aftermarket companies exceeding US$5 billion in annualised revenue within five years. This multi-channel business will create around 4,000 new jobs, with huge opportunities for career progression, particularly in terms of new management positions.”
He also specifically referred to having 200 branches in the UK. The actual figure in 2013 was 139. According to its website, Unipart Automotive has 200 branches – a figure that could certain help ECP reach its target and go beyond. This also suggests that a purchasing company (be it ECP or anyone else) could buy the company and then keep the best branches. Alternatively there will be some kind of splitting out of the branches between competing customers with each valuing different locations for different geographic or strategy reasons. However, in any purchase situation – especially in a merger and integration context – the logic of synergy would suggest that that would be some kind of branch attrition and therefore job cuts. Still, as one employee tweeted in the last days or so: some job losses are better than all jobs going.
Cost cutting and refinancing measures were in place months before the rescue talks started
Looking closure at the Unipart Automotive’s actions prior to the rescue talks, reveals that the company put a number of restructuring, cost-cutting and refinancing measures in place months before talks began.
Cost-cutting measure include the establishment of a new IT system, which was publicised in June and was said to have set the company up for a seven-figure saving. However before this (in May) the company restructured its finances with a capital injection from shareholders.
According to a report in the Telegraph, the refinancing was structured by KPMG – who have also been touted as the company’s standby administrators should things not go according to plan – and involved equity injections from both of the company’s shareholders. According to the Telegraph no external investors this refinancing as part of the deal in June.
The problem for Unipart Automotive is that the company is said to have been losing £20 million for a few years before new chief executive Mark Dixon reduced this figure to the single digit millions. The refinancing, is said to include extending its £37.5 million bank facilities, which the Telegraph reports, would have put the company back in the black a month later – roughly the same time that the rescue talks were taking place. The cost 150 job losses from the company’s 2,200 headcount.
IT reforms designed to save significant sum
When Unipart Automotive was sold to H2 Equity Partners in 2011, the company brought Dominic Ruscillo as CIO with the goal of overhauling slow and expensive information systems.
Ruscillo reports that 99 per cent of the staff are IT users but the company basically “outsourced everything” to a single small supplier. The problem was that this supplier turned over about £50 million a year compared to Unipart Automotive’s roughly £170 million.
That’s why the company engaged with IT services company Getronics and agreed a five-year contract, based on a three-phase turnaround strategy. Phase one was to implement a plan to de-risk and improve the IT infrastructure. Phase two – rationalistion with audits of software licenses and hardware estates. Phase three – business application improvement to transform how the business operates. Phase one was completed at the start of 2014.The upshot is that Getronics has committed to a 20 per cent reduction in IT operational spend. At the time, the company reported that it is “too early to put figures on cost savings” but it is likely to be a welcome addition in a pressing time. One practical impact is clear: “using the old system it took 20 minutes to log on in the morning. Today it takes one minute”. In addition the company has reduced the number of servers it has from 140 to 80.
Nevertheless, owing to the fact that we are in the situation we are now in, it is safe to say that neither the refinancing/restructuring measures not the IT rationalisation achieved quite the results that were hoped for. Having said that, they cannot have failed to have made the business a more attractive proposition as a going concern, pointing once again to the suggestions of rescue and in turn the comments of William Blair. However, with all parties holding fast to “no comment” it looks like the results of the talks won’t be known until next week. This being the case, two weeks after negotiations began things can look quite different than they did at the beginning.