Will Bapcor Ltd (ASX:BAP) acquire Kmart Tyre & Auto?

Bapcor Ltd (ASX: BAP) is Australia and New Zealand’s leading auto parts business with its Burson and Autobarn chains, along with many specialist chains.

I’m sure readers have seen that Wesfarmers Ltd (ASX: WES) is looking to offload numerous parts of its business to free up capital and move onto other targets.

One of the latest segments that’s on the chopping block is Kmart Tyre & Auto according to AFR sources.

Apparently the auction for the tyre business is nearing its end and Bapcor was very interested.

AFR Street Talk understands that final bids of more than $300 million have been given, which is a large price tag. Bapcor reportedly hired Morgan Stanley as adviser.

This acquisition would have fit the Bapcor strategy of finding targets that would bolster its business offering and improve economies of scale.

Bapcor is already a supplier to Kmart Tyre & Auto, so it is already somewhat familiar with the business. IBISWorld estimates that Kmart Tyre & Auto is the fourth largest tyre retailer in Australia.

However, Bapcor may have stepped out of the bidding at the last minute.

Edit: Since publication Bapcor confirmed to the market that it is not acquiring Kmart Tyre & Auto.

Is Bapcor a buy?

In regards to this news, I don’t think you can say this improves Bapcor’s value until we get to see the acquisition cost and whether Bapcor has indeed stopped its interest.

It does sound like a good target. There is a lot of negativity surrounding Bapcor due to the rise of electric vehicles and automated driving. However, until flying cars exist, they will need tyres.

But, Bapcor won’t just acquire for acquisition sake. The purchase price has to make sense. Bapcor has done excellently at buying businesses at the right price in the last few years.

Bapcor is trading at 22x FY18’s estimated earnings. Without the Kmart Tyre & Auto acquisition I think Bapcor is a solid buy at today’s price.

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Motley Fool contributor Tristan Harrison owns shares of Bapcor. The Motley Fool Australia owns shares of and has recommended Bapcor and Wesfarmers Limited. 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 Scott Phillips.

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