October 30, 2007 Capital Markets and Automotive Aftermarket ...


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October 30, 2007 Capital Markets and Automotive Aftermarket ...

  1. 1. October 30, 2007 Capital Markets and Automotive Aftermarket Trends
  2. 2. <ul><li>BB&T Capital Markets </li></ul><ul><li>Capital Markets Update </li></ul><ul><li>Automotive Aftermarket Update </li></ul>Table of Contents
  3. 3. I. BB&T Capital Markets
  4. 4. BB&T Capital Markets Summary BB&T Corporation BB&T Capital Markets Transactions <ul><li>Headquartered in Winston-Salem, NC </li></ul><ul><li>Member of the S&P 500 (NYSE: BBT) </li></ul><ul><li>12 th largest U.S. bank holding company based on assets of approximately $125 billion </li></ul><ul><li>Market capitalization of approximately $22 billion </li></ul><ul><li>Doubled in size in the past five years </li></ul><ul><li>1,450 banking offices and 29,000 employees </li></ul><ul><li>Investment banking professionals based in Richmond, VA, Washington, Boston and San Diego </li></ul><ul><li>Industry focused banking teams </li></ul><ul><li>Leading M&A advisor to the middle market </li></ul><ul><li>More than 350 professionals </li></ul><ul><li>Full-service investment banking platform </li></ul><ul><li>Institutional and retail sales and trading </li></ul>BB&T Capital Markets BB&T Capital Markets Offices and Client Base BB&T Capital Markets Locations BB&T Capital Markets Headquarters Closed Transactions
  5. 5. <ul><li>Leading automotive aftermarket investment banking practice on Wall Street. </li></ul>BB&T Capital Markets Leading Automotive Aftermarket Investment Banking Practice
  6. 6. II. Capital Markets Update
  7. 7. <ul><li>Private equity has and continues to radically change the M&A market and the change is “permanent” </li></ul><ul><li>Deal volume will remain strong and valuations may tighten, but quality deals will always command a premium </li></ul>Capital Markets Update Key Takeaways
  8. 8. <ul><li>Since hitting a trough in 2002, M&A transaction volume has increased by 40% </li></ul>Capital Markets Update M&A Transaction Volume M&A Transaction Volume 1995 - August 2007
  9. 9. <ul><li>A key driver of the current strong M&A market is private equity group-led LBOs </li></ul>Capital Markets Update LBO Transactions Thrive Source: Buyouts Newsletter. Value and Number of Leveraged Buyouts ($ in billions)
  10. 10. <ul><li>What Has Caused the LBO Boom? </li></ul><ul><li>Historically Loose Credit Markets </li></ul><ul><ul><li>Pay more and still get required return on equity (ROE) </li></ul></ul><ul><li>Lower required investor returns </li></ul><ul><ul><li>More money chasing deals </li></ul></ul><ul><li>Institutionalization of private companies </li></ul><ul><ul><li>Private companies more liquid than ever </li></ul></ul>Capital Markets Update
  11. 11. <ul><li>Leverage multiples in LBO transactions remain at historical highs </li></ul><ul><ul><li>Higher debt allows PE firms to pay more </li></ul></ul>Capital Markets Update Leverage Multiples Improve Returns Source: S&P's LCD Average Debt Multiples of Highly Leveraged Loans ( > $50mm)
  12. 12. <ul><li>Private equity firms have raised record levels of capital that will be “put to work” </li></ul><ul><ul><li>Excess supply of “acquisition capital” has reduced PE firms required return on equity </li></ul></ul>Capital Markets Update Private Equity Fund Raising Source: Buyouts Newsletter. Total Private Equity Capital Raised ($ in billions)
  13. 13. <ul><li>Liquidity of privately held companies has increased significantly in the last 10 years </li></ul><ul><li>Trading private companies among private equity firms is common today </li></ul><ul><li>Think about private companies as income producing assets like commercial real estate </li></ul>Capital Markets Update Institutionalization of Private Companies Source: Buyouts Newsletter.
  14. 14. <ul><li>The result has been generally increasing valuations since 2002 </li></ul>Capital Markets Update Valuation Multiples (1) Source: FactSet Mergerstat, LLC Excludes negative EV/EBITDA multiples and multiples larger than 25.0x Median EV/EBITDA Multiples (1) 35.6% 37.8% 27.2% 44.2% 26.1% 30.4% 44.2% 28.1% 24.2% 41.7%
  15. 15. <ul><li>Highway Trucking Co. is looking at strategic alternatives for its business, including a possible sale </li></ul><ul><li>How much money will Highway Trucking Co. get and who will buy it?? </li></ul>Capital Markets Update A Case Study
  16. 16. <ul><li>50% Equity </li></ul><ul><li>50% Debt </li></ul>Purchase Price: $42.0 “ Multiple of EBITDA”: 5.1x Equity Investment: $21.0 (50%) Borrowed Debt: $21.0 (50%) Debt as Multiple of EBITDA: 2.6x 5-year Return on Equity: 20.0% Capital Markets Update Case 1: Scenario 1
  17. 17. <ul><li>25% Equity </li></ul><ul><li>75% Debt </li></ul>Purchase Price: $53.5 “ Multiple of EBITDA”: 6.5x Equity Investment: $13.4 (25%) Borrowed Debt: $40.1 (75%) Debt as Multiple of EBITDA: 4.9x 5-year Return on Equity: 20.0% Capital Markets Update Case 1: Scenario 2
  18. 18. <ul><li>Leverage “supercharges” equity returns and enables higher prices </li></ul><ul><ul><li>Scenario I  Equity = 50%; Debt = 50% </li></ul></ul><ul><ul><li>Scenario II  Equity = 25%; Debt = 75% </li></ul></ul>Purchase Price Equity Investment Borrowed Debt 21.0 40.1 21.0 13.4 $ 42.0 $ 53.5 Scenario I Scenario II Return on Equity (5-years) 20.0% 20.0% Capital Markets Update Leverage Summary Concepts
  19. 19. <ul><li>Impact on prices of lower required return on equity </li></ul>Purchase Price: $53.5 “ Multiple of EBITDA”: 6.5x Equity Investment: $13.4 (25%) Borrowed Debt: $40.1 (75%) Debt as Multiple of EBITDA: 4.9x 5-year Return on Equity: 20.0% Capital Markets Update Case 2: Scenario 1
  20. 20. <ul><li>Impact on prices of lower required return on equity </li></ul>Purchase Price: $56.6 “ Multiple of EBITDA”: 6.9x Equity Investment: $16.5 (29%) Borrowed Debt: $40.1 (71%) Debt as Multiple of EBITDA: 4.9x 5-year Return on Equity: 15.0% Capital Markets Update Case 2: Scenario 2
  21. 21. <ul><li>Scenario I  $13.4 million Equity and 20.0% Return </li></ul><ul><li>Scenario II  $16.5 million Equity and 15.0% Return </li></ul>Purchase Price Equity Investment Borrowed Debt 40.1 40.1 13.4 16.5 $ 53.5 $ 56.6 Scenario I Scenario II Return on Equity (5-years) 20.0% 15.0% Capital Markets Update Leverage Summary Concepts
  22. 22. <ul><li>With the recent developments in the credit markets and the resulting lack of liquidity, it is uncertain whether the strong volume of M&A transactions seen over the past 24 months will continue </li></ul><ul><li>Impacts of credit crunch will likely be: </li></ul><ul><li>More equity and less debt will lead to lower valuations </li></ul><ul><li>Lower PEG valuations will result in a re-emergence of the strategic buyer </li></ul><ul><li>Middle market M&A will be significantly more insulated than larger transactions </li></ul><ul><ul><li>Smaller deals don’t require syndication </li></ul></ul><ul><li>Quality deals will still receive premium valuation </li></ul>Capital Markets Update Recent Developments
  23. 23. III. Automotive Aftermarket Update
  24. 24. <ul><li>After a slow start to September, October is picking up, but certain geographic areas remain weak </li></ul><ul><li>Retailers are trying to follow the growth to DIFM </li></ul><ul><li>Retailers aggressively seeking direct sourcing opportunities </li></ul>Automotive Aftermarket Update Key Takeaways
  25. 25. <ul><li>After a slow beginning to September we are seeing acceleration in October and we are beginning to hear some cautious optimism, despite up-tick in gas prices </li></ul><ul><li>Regional performance differences exist </li></ul><ul><li>We believe the deferral of routine maintenance that began in early 2006 has spurred significant reductions in discretionary automotive maintenance </li></ul><ul><li>However, our outlook is cautiously optimistic for the remainder of Q4 and into 2008 as this trend reverses and the macro economic environment stabilizes </li></ul>Automotive Aftermarket Update Current Market Environment
  26. 26. <ul><li>Excluding Midas, same-store-sales trends were better than expected for Q3 </li></ul><ul><ul><li>Monro +2%; O’Reilly +4.3%; LKQ +15.9%; Midas -3.9% </li></ul></ul>Automotive Aftermarket Update Current Market Environment Dual Marketers includes AZO, AAP, CAO, ORLY; Service shops includes MDS, MNRO. Collision Distributors includes LKQX and KEYS through Q2’07 and only LKQ for Q3’07. As of 10/26/07, only ORLY, LKQ, MDS, and MNRO reported Q3’07 results Quarters adjusted for calendar year.
  27. 27. <ul><li>In general aftermarket valuations have dipped in Q3’07, but most segments remain at or above historical valuations </li></ul>Automotive Aftermarket Update Current Market Environment Historical TEV / EBITDA Ratio By Segment Manufacturers include: ATAC, CTB, SNA, MPAA, PLI, DORM, SMP, TEN. Professional Installers include: MDS, MNRO. Dual Marketers include: AAP, AZO, CAO, ORLY, PBY, GPC, UNS. Collision Parts Distributors include: LKQX (went public in 2003)
  28. 28. Automotive Aftermarket Update Current Market Environment <ul><li>Year-to-date, manufacturers and collision focused companies are outperforming the S&P 500; other segments are lagging </li></ul>Manufacturers Collision Professional Installers Dual Marketers As of 10/25/07 S&P 500
  29. 29. <ul><li>To continue to drive top-line growth, DIY focused retailers are repositioning their business model for DIFM distribution growth </li></ul>Automotive Aftermarket Update DIY to DIFM “ I think clearly we have the greatest opportunity on Commercial. We have 13% market share on DIY, 1.3% on Commercial. We have a tremendous long-term opportunity in Commercial and a tremendous long-term opportunity in DIY, but we have a more mature model in DIY than we do in Commercial.” September 18, 2007 “ We are increasing our commercial focus to take greater advantage of the full potential of the large and growing commercial market. We believe that over the last few quarters we've missed meaningful opportunities to drive our commercial sales, and as a result, our comp growth in this area has slowed.” August 9, 2007
  30. 30. <ul><li>Commercial distribution segment is highly fragmented and growing faster than retail distribution </li></ul>Automotive Aftermarket Update Commercial Distribution - Highly Fragmented, Faster Growth Retail Distribution: $32 billion 1% - 2% Growth Other: 54% Commercial Distribution: $54 billion 4% - 6% Growth Napa (GPC) Carquest (GPI) Advance Uni-Select Autozone O'Reilly Parts Depot CSK Other: 83% Pep Boys CSK O'Reilly AutoZone Advance Wal-Mart Other: 54%
  31. 31. <ul><li>Faster growth leads to higher valuations </li></ul>Automotive Aftermarket Update Commercial Distribution – Higher Valuation DIY DIFM 1% - 2% organic growth 4% - 6% organic growth
  32. 32. Automotive Aftermarket Update O’Reilly and AutoZone Case Study Same Store Sales Long Term Earnings Growth Rate Source: CapitalIQ. Represents consensus estimate. AutoZone Footprint Source: Company website. O'Reilly Footprint Source: Company website.
  33. 33. <ul><li>In addition to top line growth, parts distributors are looking to increase direct sourcing to reduce costs and grow earnings </li></ul><ul><ul><li>Currently, most dual marketers have only a small percentage (5-10%) – but expect this to increase over time </li></ul></ul><ul><ul><li>Parts coverage, quality and fill rates are no longer such obstacles </li></ul></ul><ul><ul><li>Profit improvement should be a direct result – with greater benefit to the first movers </li></ul></ul>Automotive Aftermarket Update Direct Sourcing “ We use a combination of private label, and prominent national brands to offer a better-best, or in some cases a good-better-best strategy across key categories. This allows us to take advantage of the gross margin opportunities that come from importing products from lower cost countries where some of the aftermarket products are being manufactured.” April 25, 2007 “ We also believe that we have significant opportunity in direct importing over time…We began it in earnest about two years ago…and we are working now on our parts area as the quality in China becomes acceptable to bring in more product.” March 6, 2007
  34. 34. Automotive Aftermarket Update Direct Sourcing Average Hourly Compensation Costs of Manufacturing Workers Source: Bureau of Labor Statistics, Monthly Labor Review – August 2005. Notes: U.S. Indexed at 100; NIE’s are the newly industrialized economies of Hong Kong, Korea, Singapore, and Taiwan; EU(15) are the European Union member countries prior to the expansion to 25 countries on May 1, 2004. Data from 2002.
  35. 35. BBTCM's annual party during Automotive Aftermarket Industry Week in Las Vegas BB&T Sponsors the #2 Car in the NASCAR Busch Series Member Jonathan Carey BB&T Capital Markets (617) 316-1336 [email_address]