In a bid to boost its balance sheet and refocus on its core businesses, Metcash Limited (ASX: MTS) has agreed to sell its Automotive division to automotive aftermarket parts specialist Burson Group Ltd (ASX: BAP) for a sum of $275 million.
In a recent interview conducted by the Fairfax press, Burson's Chief Executive Officer Darryl Abotomey confirmed that his company would closely examine the division as a potential acquisition due to the minimal overlap between the two firms. This came after Metcash originally posted its intentions to pursue an initial public offering (IPO) for the business just one month ago.
Metcash had hoped to reap $350 million for the division (which includes Autobarn and Midas) in an IPO while some analysts suggested it could carry a value north of $400 million, thus highlighting the great deal struck by Burson Group today. The purchase price represents a multiple of 9.9 times full-year 2015 (FY15) earnings before interest and tax (EBIT), while Metcash expects to receive net proceeds after tax of $210 million from the sale.
Commenting on the transaction, Metcash's CEO Ian Morrice said: "Through discussions with Burson, it became clear that the parties could reach an agreement which represented both attractive value for shareholders and certainty of transaction completion… The sale makes sense for both Metcash and the Automotive Business."
Why it happened
Indeed, Metcash is a motivated seller given that it has been under immense pressure in recent years as a result of intense competition from Woolworths Limited (ASX: WOW) and Wesfarmers Ltd (ASX: WES). Today, it reported a $348.2 million net loss after tax for FY15, inclusive of significant items, highlighting the need for it to refocus on its core Food & Grocery Pillar.
On the other hand, Burson Group, which recently opened its first Western Australian store, is in expansion mode and looking for attractive acquisitions to strengthen its nationwide network. In an announcement to the market this morning, Burson said that the acquisition was highly complementary to its position in the market and enhances its competitive position and service levels for customers. The acquisition has not altered Burson's target to have 175 Burson-branded stores by June 2019.
In order to fund the acquisition, Burson will raise a combination of debt and equity financing. This will include:
- A $218 million underwritten 7 for 15 pro-rata accelerated renounceable Entitlement Offer at $2.85 per share.
- A $15 million placement
- $71 million from increased debt facilities
Burson has entered a trading halt until Thursday pending the capital raising.
Should you buy Burson Group?
Australia's automotive aftermarket sector is experiencing strong growth which is expected to continue well into the future. The average vehicle count per 1,000 residents has climbed steadily over the last decade, while passenger vehicles are also ageing, creating a bigger market for 'Do-it-for-me' (DIFM) brands to target.
Burson Group is a specialist in the DIFM market and appears to be making all the right moves in expanding its network across Australia. The acquisition of Metcash's Automotive Division puts it in a fantastic position to benefit from this trend and it looks like a reasonable buy at today's price of $3.40.
