LKQ Purchase Fills in Strategy Gap
The narrow-moat firm is buying Germany-based wholesale distributor Stahlgruber GmbH.
We are raising our fair value estimate for narrow-moat-rated LKQ (LKQ) to $41 from $34 after the company announced a definitive agreement to acquire Germany-based wholesale distributor Stahlgruber GmbH. Management said that the acquisition price represented an enterprise value of EUR 1.5 billion, a 1 times revenue multiple, and a 10 times EV/EBITDA multiple (including net present value of tax and cost synergies). Stahlgruber represents LKQ’s entry into the German automotive aftermarket and adds a state-of-the-art distribution hub in a critical location, filling in a strategic gap by connecting pan-European operations. The company expects the transaction, which is subject to EU antitrust clearance, to close sometime late in the first quarter or early in the second quarter of 2018.
The shares of LKQ were already trading in the 3-star range prior to the acquisition announcement, and the increase in our fair value estimate results in no change in our star rating. The stock closed the day of the announcement up $0.12 to $40.34. Currently trading at a slight 2% discount to our new fair value estimate, we view the shares of LKQ as reasonably priced relative to our estimates for revenue, profitability, and returns on invested capital.
The company expects the addition of Stahlgruber to be earnings-accretive by $0.14-$0.16 per share in 2018 and by $0.17-$0.19 per share in 2019. LKQ estimates Stahlgruber 2017 revenue of EUR 1.6 billion and EBITDA of EUR 128 million. From 2014 to its estimated 2017, management states that Stahlgruber’s annual revenue and EBITDA growth amount to 7% and 9%, respectively. Assuming an April 1 closing, and through 2019, we estimate that, including 5% organic revenue growth and USD/EUR currency translation in the $1.20 range, Stahlgruber incremental revenue and EBITDA come to roughly $2.0 billion and $170 million, respectively. We estimate LKQ 2017 revenue and EBITDA at $9.6 billion and $1.1 billion, respectively.
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Richard Hilgert does not own (actual or beneficial) shares in any of the securities mentioned above. Find out about Morningstar’s editorial policies.