by Maureen Flanagan
The Parts Plus Group, Inc., a distributor of auto parts serving independent and chain car repair shops, new car dealers, municipalities and other fleet owners in the Eastern United States, is moving into high gear as it makes its fifth acquisition in two years. Founded in 1997, Parts Plus has energetically pursued an acquisition strategy, purchasing several closely held, family-owned companies. As a result, it has grown to include six distributors operating in 103 East Coast locations from Massachusetts to Florida. On October 21, 1999, it completed the purchase of yet another company, Parts Distributors, Inc. (PDI), a mid-Atlantic warehouse distributor. This acquisition was supported by financing from several investor groups and American Capital Strategies, Ltd. (NASDAQ:ACAS), which together provided a total financing package of $27 million in subordinated debt and convertible preferred stock. With its latest acquisition, Parts Plus becomes the fifth largest national warehouse distributor serving the auto repair industry.
"Consolidation gives Parts Plus' individual distributors increased purchasing power, operating efficiencies, and access to distribution and software systems to move 30,000 to 50,000 products a day to repair locations all over the East Coast," said company President and CEO Paul Lehr. "With our latest acquisition, we expand our market in the mid-Atlantic and move into managing inventory for municipal fleets of major East Coast cities," Lehr said.
Parts Plus has successfully carved out a niche in the "do-it-for-me" sector of the auto repair industry, a $60 billion market that provides auto repair shops and other customers with the parts they need to provide same day service. This niche business is supported by an extensive warehouse and parts delivery system that usually includes jobbers, or wholesalers who receive parts from the warehouse and deliver to the service location. A typical warehouse carries nearly 200,000 different replacement and component parts for automobiles and light trucks from various manufacturers, and its jobbers may carry more than 30,000 products. Parts Plus uses state-of-the-art computer inventory and tracking systems so that the necessary parts get from the warehouse to the jobber to the customer in time for same-day repair service. Some warehouses regularly deliver to installers and jobbers twice a day and some make more than four daily deliveries. Parts Plus is the largest member of The Parts Plus Association, the country's third largest association of auto parts distributors, giving it significant leverage in the marketplace.
The company was founded in 1997 by industry veteran Lehr, who had been President since 1980 of Motor Age, a distributor operating in the New York metro area. Lehr sold a portion of Motor Age to investors and, at the same time, the company merged with The Parts House, Inc., a distributor in the Southeast operating 20 warehouses and selling auto parts to new car dealers, service chains such as Goodyear and fleet accounts.
Parts Plus quickly began a series of acquisitions, starting in April 1998 with Brookside Automotive, a small warehouse chain in Southern New England. It then began to acquire warehouses that also operated their own captive jobber locations directly. In October 1998, the company purchased Davie Automotive, Inc., a chain of 21 jobber locations in North Carolina and South Carolina serviced by three regional warehouses. In December 1998, the company acquired Mechanics Auto Parts, Inc. (MAPI), a chain of 21 New Jersey and Pennsylvania stores serviced by one central warehouse. Both Davie and MAPI were well-established closely held companies serving independent and chain repair shops in the "do it for me" market. Their additions increased the company's profitability -- making the move to owning jobber locations directly and sustaining the profitability of those locations central to the company's success.
To continue its strategic acquisition strategy, the company began looking for additional capital through financial partnerships that would support its growth. In October 1999, Parts Plus teamed with American Capital and other investors, including John Hancock, Citizens Capital, and IBJ Whitehall Capital Corporation, raising a total of $27 million. The transaction was arranged by Sterling Ventures Limited (Sterling), an investment firm with $75 million in investments, and by RFE Investment Partners (RFE), a firm that has raised and invested more than $600 million in 115 companies through six investment partnerships. Sterling and RFE are the principal shareholders of Parts Plus along with the prior owners of the acquired companies.
For its part, American Capital invested $4.44 million of senior subordinated debt and $555,000 of convertible preferred stock. With capital resources exceeding $360 million, American Capital provides middle market companies with subordinated debt, senior debt and equity to support acquisitions, growth, employee and management buyouts, liquidity and restructurings. American Capital's investment portfolio includes growth acquisitions and roll-ups for middle market companies in diverse industries. For example, in September 1998, American Capital invested in Cycle Gear, an ESOP company that has grown into the largest multi-store retailer of motorcycle parts in the country. In March 1999, American Capital financed Auxi-Health, Inc., a rollup of home health care providers in the Midwest and South, and later provided additional funding for a follow-on acquisition. American Capital's portfolio includes companies in a wide range of industries from kayaks and canoes to small aircraft manufacturing.
"Parts Plus has an excellent collective management team, many of whom have in-depth knowledge and expertise from a lifetime of experience in the industry," said Ira Wagner, American Capital Principal. "The managers will for the most part continue to run their individual businesses; while at the same time they will gain access to increased purchasing power, a central organization, and an expanded system of operations," Wagner added.
With this new financing, Parts Plus acquired PDI, a family-owned business that had been in operation for 75 years. PDI is a growing chain of seven warehouses serving independent and chain repair shops. It also manages the parts inventory for the municipal fleets of several mid-Atlantic cities. PDI has been a member of the Parts Plus Association of buyers for 15 years.
The Parts Plus Group has established a solid platform in the auto sales "aftermaket" industry, historically a stable industry resistant to macroeconomic cyclicality. (In times of economic downturn, people tend to fix old cars rather than buy new ones.) Of the total 1998 aftermarket sales of about $92 billion, $60 billion were sold in the "do-it-for-me" category and $30 million were purchased in the "do-it-yourself" category. As the third largest buying group after NAPA and Carquest, The Parts Plus Association purchases about $1 billion auto parts annually through its association of buyers, giving it the advantage of volume purchasing power. It sells most automotive parts under manufacturer brand names instead of using its own name. Many customers prefer this practice, which is not commonly used by other large buying groups.
With its large network of warehouses and jobbers, The Parts Plus Group has logistic advantages in the market, which includes Southern New England, the New York Metropolitan area, Southern New Jersey, Philadelphia region, North Carolina and Florida. Its growing network of warehouses and jobbers enables the company to get the parts to the service locations quickly and efficiently and at lower cost. It also has access to the superior information systems developed at MAPI, which it plans to implement into the overall organization. In the auto parts business, superior software translates into superior customer service.
As a relatively large player in a fragmented market, Parts Plus expects to explore further acquisition opportunities and will be a likely buyer for other Parts Plus Association members whose owners may seek liquidity for their investment in the future. And, with the purchase of PDI, the company becomes a leader in fleet management contracts, a segment of the market it plans to grow.
"With our continuing expansion and anticipated further acquisitions of auto parts distributors in the Eastern United States, we look forward to providing a level of customer service unequalled in the market," Lehr said. "We have high expectations for Parts Plus as we gear up for the next millennium."
