Bapcor Ltd (ASX: BAP) ex-Burson, has today announced that it intends to takeover New Zealand company Hellaby Holdings Ltd (NZE: HBY) for a total cost of NZ$322 million.

Automotive parts supplier and distributor Bapcor clearly has its eyes on Hellaby’s automotive division, which the company says is highly complementary to its existing trade-focused distribution business. Bapcor says the acquisition will allow it to enter New Zealand’s automotive parts market and use its scale to expand further into the market.

Bapcor is likely to sell off the company’s resource services and footwear retailing businesses, which clearly aren’t a natural fit with the rest of Bapcor’s automotive businesses.

Hellaby’s automotive division saw revenues of NZ$260 million and earnings before interest, tax, depreciation and amortisation (EBITDA) of NZ$26.8 million for an earnings margin of just over 10% in the 2016 financial year. Bapcor clearly sees an opportunity to grow margins given its own group EBITDA margin is over 11%.

It also means the acquisition multiple is roughly 6.9x EBITDA given Hellaby’s $46.8 million of earnings in 2016.

The automotive division’s wholesale business includes around 60 stores in New Zealand, as does the trade business operating under a number of different brands – and it also appears to be another opportunity for Bapcor to rationalise the brands under its one main brand.

Hellaby’s resources services division saw revenues of NZ$176 million and EBITDA of NZ$11 million in FY2016, while the Footwear division has 117 stores across New Zealand and delivered NZ$137.3 million in revenues and NZ$4.3 million in EBITDA.

The equipment division is being sold off to Maui Capital Aqua Fund for NZ$81 million and expected to finalise at the end of September.

The deal appears to make a lot of sense for Bapcor, opening the door to New Zealand for a fairly cheap price. The sale of the resources and footwear divisions are likely to significantly offset the NZ$322 million being paid for the whole business too.

Bapcor will fund the acquisition via a combination of debt, equity and existing cash holdings, raising $165 million in a placement at $5.85 a share, an additional $20 million is expected to come from a share purchase plan at the same price.

Foolish takeaway

If Bapcor can sell off the resources and footwear divisions, then this deal makes plenty of sense. Entry to New Zealand, a complementary automotive business, potential to increase sales growth, products and grow margins and an inexpensive price are all positives for the company.

 

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Motley Fool writer/analyst Mike King owns shares in Bapcor. You can follow Mike on Twitter @TMFKinga

The Motley Fool Australia has a position in Bapcor. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy. This article contains general investment advice only (under AFSL 400691). Authorised by Bruce Jackson.