Advance Auto to Acquire General Parts

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Advance Auto Parts Inc. (AAP) announced the acquisition of General Parts International Inc. for $2.04 billion. The successful competition of the acquisition by late 2013 or early 2014 will make Advance Auto the largest after-market auto parts retailer in North America.

The combined entity is expected to boast annual sales of $9.2 billion and employ about 70,000 workers. The annual sales will be greater than the total sales of AutoZone Inc. (AZO), which is currently the largest player in the market.

Advance Auto expects that the transaction will create $160 million of annual run-rate synergies over the first three years after the successful closure of the deal. The acquisition will also help in generating higher cash flow and earnings per share. It is expected that the earnings will accelerate by 20% excluding the one-time charges.

This acquisition will enhance the growth of the company and shareholders’ value. It will provide scale advantage to Advance Auto and enable the company to spread out geographically. In addition, it will support the company in expanding its product and category offerings and sales network.

The acquisition will be financed by the senior notes, bank debt and existing cash on hand of Advance Auto. The company also expects the balance sheet to remain strong after the acquisition owing to the expected strong cash flow of the merged business.

Following the acquisition announcement, Moody's Investors Service affirmed the senior unsecured rating of Advance Auto at ‘Baa3’ with a stable outlook. The agency believes that this acquisition will enhance the value of the company and the transaction is fairly priced.

General Parts is a leading private distributor and supplier of original equipment and aftermarket replacement products for commercial markets. It is the largest member of Carquest Auto Parts and WORLDPAC brands. It generates about $3 billion annual sales from 2,600 Carquest locations. Among these, 1,200 are owned by the company and the rest are independent locations.

Advance Auto Parts is primarily engaged in selling replacement parts (excluding tires), accessories, maintenance items, batteries and automotive fluids for cars and light trucks. The company caters to the do-it-yourself (:DIY) and commercial customers.

Advance Auto is scheduled to report its third quarter results on Oct 31, 2013. Advance Auto expects to report a 17.4% rise in earnings to $1.42 per share in the third quarter of fiscal 2013. The amount includes expenses of 4 cents per share related to the pending acquisition of General Parts and BWP integration expense of 2 cents per share.

During the third quarter of 2013, revenues went up 4.3% to $1.52 billion compared with $1.46 billion reported a year ago. The increase was driven by the acquisition of BWP Distributors and the net addition of 170 new stores in the last 12 months, partly offset by comparatively higher decline in comparable store sales in the third quarter of 2013. Operating income is expected to increase 13.5% to $170.7 million. Advance Auto continues to expect earnings between $5.30 and $5.45 per share for 2013.

Advance Auto, which is a prominent player in the automotive replacement parts and accessories industry along with AutoZone, O’Reilly Automotive Inc. (ORLY) and CarMax Inc. (KMX), retains a Zacks Rank #3 (Hold).

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