After a reported $10 billion cash bid for NAPA, Aftermarket Matters asks what’s behind the potential acquisition and what it means for other aftermarket players
As it was reported in July, Atlanta-based Genuine Parts Co. (GPC) has the interest of O’Reilly Auto Parts, headquartered in Springfield, Mo., with a cash bid for its NAPA Auto Parts division that could be valued as high as $10 billion or more. A deal could happen as soon as the end of summer.
But what’s behind this acquisition? Why is NAPA Auto Parts an attractive target now for O’Reilly? What does it signal about the type of deal buyers are chasing in the aftermarket space? And what does a shrinking retail landscape mean for regional players?
Aftermarket Matters Weekly spoke with Todd Cassidy, a managing director in the investment banking group at business advisory firm Portage Point Partners, who specializes in the automotive and aftermarket ecosystem, about the potential acquisition.
The following are key takeaways from the interview. It has been edited for length and clarity.
Why is NAPA Auto Parts an attractive target now, and what does it signal about the type of deal buyers are chasing the aftermarket space?
When GPC indicated they were going to split their automotive and industrial businesses into two, it made it a natural actionable target.
As part of GPC, you didn’t really know what the go-forward strategy was and whether it was even something actionable to go after. By splitting the businesses — or indicating they’re going to split the business — it meant there was something potentially to do there.
That’s the first piece, but the second piece is the more important part. Consolidation in the industry is going to be important going forward. Scale matters, if we’re talking about international supply chains — we’ve seen it with COVID and chip shortages, for example.
Obviously this is a big scale play for [O’Reilly Auto Parts]. It would make them, effectively, number one in the United States. And I think it’s too early to tell what they’re going to do with it, but there’s an international aspect to NAPA that O’Reilly doesn’t have.
Whether that’s a highly attractive element to them or if it’s a nice-to-have, it would give them international scale and scope.
There’s also significant synergy potential. I think something like 65 percent of all O’Reilly stores have a NAPA Auto Parts location within 5 miles. There would be benefits of being able to eliminate locations or keeping the best of breed or changing what’s in the various locations from an inventory management standpoint: right-sizing it to get the proper working capital across the whole portfolio.
How would this acquisition benefit O’Reilly’s supply chain? What does it bring to the table?
It gives them access to all the vendors that NAPA would have been working with — not that there is much that’s dissimilar — but on the margin it might open up a few different vendors they’re able to source from.
It gives them greater scale and better audience with some of the names: AutoZOne was number one, now you become number one. You kind of become the most important mouth to feed out there. When I think of the supply chain and some of the issues we had during COVID, there was a fight to get product. People were paying whatever they could to get containers here and to get product on the shelf.
If you’re at the top of the list in any type of a disruption that might occur, you’re gonna be fed first, generally.
How would this deal impact the e-commerce channel and online parts sales?
E-commerce has been becoming a much larger part of the automotive aftermarket with a 10- or 15-year grow trend. If you look at growth rates and sales by channel, digital sales are growing the fastest.
This acquisition could also be a defensive play to get scale in a market where all traditional retailers are losing share to Amazon, walmart.com and others in the independent marketplace that are selling parts now.
A lot of the parts that are sold online are ultimately getting picked up in a store. That would benefit somebody who has scale and locations everywhere. Amazon’s not going to open up auto parts stores, at least not to my knowledge yet.
As people become more comfortable over the years generations, you’re going to see more and more sales online. It is — and continues to be — a growing segment of the automotive parts sales network.
Amazon may not be a large purchaser in the automotive parts segment today, relative to some of these other players, but they’ve shown what they can do in other markets. And they’ve clearly identified automotive aftermarket part sales as a large and attractive market to go after. By having more locations, O’Reilly has a defense against a pure e-commerce player.
How would you place your bet on this acquisition going through?
I think O’Reilly today has just under 6,000 company-owned stores while AutoZone has a little over 6,000 company-owned stores. NAPA has maybe 2,500 company-owned stores and another 4,000 or so franchises.
So even though it would be a large acquisition — and it does consolidate a number of stores — it would make a competitor twice as big as the next. But even becoming 50 percent or even 25 percent of the market, there’s still additional fragmentation. I think it’s highly likely it will go through.
I don’t think they’ll be able to keep every location, however, so there could be regional divestments that need to occur. I don’t see this as that large where they’re creating a monopoly in the industry, there’s still other places to go. But with the “Amazons” of the world, they’re competing against other channels that are growing faster.
What’s O’Reilly’s secret sauce?
They’ve proven the ability to do it. The CSK merger that they did back in 2008 was much smaller: a $1 billion deal versus a $10 billion deal that we’re looking at today.
But, still, it was sizable and very complex. CSK was also struggling at the time, and so it was a bit of a turnaround that they had to operate. If you look a few years later, O’Reilly is doing very well. Presumably the CSK stores that were brought in were brought up to O’Reilly standards.
And so they’ve proven that their operating model is strong and that they can effectively integrate acquisitions. This [NAPA-O’Reilly deal] is a different animal altogether, given the size and scale, but if you could do one that’s a tenth of the size, you’d think you could pull something like that off as well.
What does a shrinking retail landscape mean for independent regional players competing in a more concentrated field?
It creates challenges because you don’t have the purchasing power of these larger organizations. It potentially brings to the front some buying groups and the importance they have for the independent channel. They would help get access to some of the volume discounts that the larger players have access to just because of their scale.
There’s price shoppers and people who look at quality knowledge and relationships. There are some people, particularly in the automotive aftermarket space, who don’t like the 800-pound gorilla and they avoid it out of principle.
There’s probably room still for independent stores, but it’s still going to be a competitive environment with a larger, more consolidated player. If O’Reilly acquires NAPA, instead of having two competitors in a region, you may now have one. It may be one stronger competitor, but one has been eliminated, so potentially that makes an opportunity for independents.
Independents might become the de facto second choice, whereas before it was a stop at O’Reilly then a stop at NAPA before visiting the independent store. It stops being a three-person race in some of these markets. I think there’s unintended good consequences for people, and in this industry there are some loyalties.
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