FOCUS Investment Bankers Automotive Group has come out with a summary of the consolidation activity that took place in the auto body industry in 2014.
FOCUS believes the most important group in this consolidation trend is the “Big Four”: The Boyd Group (public), Caliber Collision, Service King and ABRA. The second tier (greater than $20 million in annual sales), it says, consisted of 40 separate non-dealer entities at the beginning of 2014. It estimated that a third tier of MSOs between $10 and $20 million in revenues included more than 120 additional operators. Two other sectors of the industry FOCUS tracks include networks/franchisors and dealer MSOs.
FOCUS states that the volume of transactions concluded by the Big Four consolidators in 2014 far exceeded any expectations it might have had even as late as the NACE | CARS Show in July. The total number of acquired and new shops for the Big Four, according to FOCUS, exceeded 374, on a beginning base of 614 shops, representing 50 percent growth in a single year.
Most Important Transactions
There were four “extraordinarily important” transactions during 2014, Focus says: Blackstone’s acquisition of a majority interest in Service King, Service King’s acquisition of Sterling, the acquisition of ABRA by Hellman & Friedman and the joint acquisition of Craftsman/Pohanka by Caliber.
FOCUS says ABRA’s acquisition by Hellman & Friedman in August 2014 was significant because it confirmed the intentions of the largest private equity firms to broaden their investments in the collision repair space.
“Hellman & Friedman had contended seriously for other large acquisitions in the past,” said David Roberts, managing director of FOCUS, “and this year they pulled off a transaction that richly rewarded prior investors Platinum Equity and existing management.”
Caliber Buys Craftsman/Pohanka
The Caliber acquisition of Craftsman/Pohanka in the DC metro area was significant, FOCUS says, because it demonstrated the discipline in Caliber’s “smile” strategy of acquiring platforms from the West Coast to the East Cost across the southern half of the U.S.
“Superbly managed and rapidly growing in one of the most attractive markets in the country, Craftsman/Pohanka was comprised of two separate organizations that combined their assets in the deal,” Roberts said. “With 25 shops, the acquisition of these two organizations gives Caliber a market-leading share in the metropolitan DC market with a plethora of DRPs ranging from State Farm to GEICO to Amica as well as a pole position in the dealer market with the 27 Pohanka dealerships in the region.”
Service King Buys Sterling
Service King’s long-rumored acquisition of Sterling finally closed in June 2014. In a single transaction, Service King grew by 60 percent. With shops in 15 different states, the transaction created entry points into some of the most desirable markets in the U.S., states FOCUS. Following the Sterling acquisition with two highly regarded California MSOs, Service King has now launched into a $4 billion market where the two most significant players previously had been Caliber and Cook’s Collision.
Blackstone Invests in Service King
An increasingly common phenomenon in the private equity industry, FOCUS says, is the purchase by one large private equity group (PEG) of all or a large portion of another PEG’s investment in an attractive industry. Hellman & Friedman’s buyout of Palladium’s investment in a recap of ABRA was a good example.
“Blackstone’s acquisition of an undisclosed but majority interest in Service King from Carlyle was another emphatic endorsement of continuing investment in the collision repair industry,” Roberts said. “While Carlyle earned something like a 4x return on their acquisition of Service King in the summer of 2012, Blackstone may have similar return aspirations.”
Other PEG Investment in the Industry
PEGs have been investing in the industry for the past 20 years, states FOCUS. Many of the original investors from Blue Capital to BBT to Capital Z and a dozen others sold out of their investments back in the early 2000s, but those firms that stuck with the industry or invested later in the investing cycle have been well-rewarded, says FOCUS.
“Consider the success of Prudential in their ABRA investment which they sold in 2011 and the extraordinary returns earned by their successor, Palladium. The relentless increase in The Boyd Group’s publicly traded unit values and ONCAP’s acquisition of Caliber in 2008 further demonstrate the continued attractiveness of the sector continued.”
In 2006, KDA, a Pasadena, Calif.-based family office, invested in Kadel’s Collision of Portland, Ore., when it consisted of only 10 shops. Kadel’s has now grown to 23 shops across Oregon, Washington and Idaho and continues to expand with KDA’s support. Champlain Capital of San Francisco and Boston invested in CARSTAR back in 2008.
Carousel Capital of Charlotte, N.C., along with management, recapitalized Joe Hudson’s Collision Centers headquartered in Montgomery, Ala., last fall.
New York-based Harvest Partners invested in MAACO through its Driven Brands acquisition in 2011.
“Interestingly, they acquired Driven from the aforementioned Carousel Capital!” said Roberts.
Numerous other PEGs continue to scour the industry looking for acquisition or investment opportunities, says Roberts. “Private equity investors are not yet finished with the industry.”
Moving On to Greener Pastures?
A frequent question arises about the patience of Private Equity investors in the industry, says FOCUS, with many pointing to the failed investments by private equity of the late 1990s and speculating that a similar cycle may repeat itself. There are a number of reasons why such an event is less likely this time, FOCUS believes.
“The PEGs doing the investing today are substantially larger and more diversified than those of the ‘90s,” said Roberts. “The companies in which they are investing are also much larger, their managements and systems are far more experienced and sophisticated, and the opportunities to expand are not just limited to acquisitions. While it appears the Big Four seem bent on acquiring every large MSO in sight, they are also aggressively identifying and developing lower cost brownfield and greenfield shops where investment returns are substantially greater than through acquisitions.
“While the rate of growth may slow down in the coming years, penetration by the 50 largest MSOs including the Big Four today is less than 15 percent of the total industry revenue. With a goal of 40 to 50 percent penetration, there are many years of profitable growth ahead for well-capitalized entities, not just the Big Four.
“Finally, as the complexity of vehicle repairs and the investments in equipment and training for shops continues to increase, the migration of repairs from smaller, less well capitalized shops to certified, trained and well-equipped MSO shops will undoubtedly continue to drive up their volumes. Even as collision avoidance and connected vehicle systems attenuate the frequency of collisions, the costs of repairs will have a reverse impact on total repair volumes.”
From the Private Equity investors’ perspective, they expect to see fewer cars to repair and more expensive repairs, increasingly repaired in large MSO and consolidator shops, states FOCUS.
“All this points to continued interest and investment in the industry,” concludes Roberts.