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An established vendor with a successful 40-year track record in the auto parts business is looking to acquire a competitor at a fire sale price. The competitor is an established one stop metal fabrication company whose founder passed away during the Covid-19 pandemic, and surviving family members have no interest nor expertise in the metal business. The company has been mismanaged for the past few years due to the untimely death of the founder and had no leadership transition plan in place.

After the death of the founder, long-term client contracts were mis-priced in the covid inflationary environment. In addition, SG& A expenses were extremely bloated by family salaries. These issues can be easily remedied with new management re-pricing client contracts to transfer direct raw material costs to clients in order to re-establish historical average gross margins. A simple adjustment to cost controls for direct raw materials and better expense controls with the removal of legacy family salaries will immediately lead to the return of positive EBITDA.

The Target Company The target company is one of the largest suppliers ($110MM annual revenues and historical EBITDA margins of 5%-9%) of metal parts and assemblies with 400+ employees working in 12 facilities spread over 700k sf. A leader in contract manufacturing with decades of experience and a one stop metal works shop (e-coating, stamping, forming, laser cutting, welding, assembling, and casting, etc.) that provides flexible customized proprietary services to clients in autos, buses, military vehicles, construction and farming equipment. The facilities are also strategically located in close proximity to the major proprietary cluster for U.S. auto parts industry.

The target company is critical to the auto parts supply chain for several global top tier auto makers. The secret sauce to the target company’s competitive advantage is from the proprietary tools, dyes, and intellectual property provided by clients that are critical to the auto makers production process thereby making this a very sticky business with long term client relationships. The proprietary customized services provide the company with a sustainable economic moat and a huge barrier to entry for competitors.

The Acquirer The acquirer is a family-run global business with a successful 40-year track record in the auto parts industry. The firm has global operations (100 + employees) across southeast USA and South America, and exports to over 43 countries. It’s one of the top distributors for several global auto giants, and generated $40MM in 2022 revenues with a very profitable 15% EBITDA margin.

The Current Situation The acquirer has received the stamp of approval from target company’s top client to acquire the business due to its long-term relationship with target company’s top client. Acquirer has a binding LOI, and also signed a management agreement to operate their daily operations. The acquirer is already consulting with the firm to restructure and reduce inefficiencies in their operations.

The Investment Opportunity The acquirer is looking for $17.5MM in acquisition financing (leverage buy-out) or equity JV partnership to acquire the legacy asset. The target business has a very healthy balance sheet and will have zero debt at closing because intracompany debts that will be forgiven by the founder’s family. In addition, the top client has also agreed with the acquirer to forgive the $20MM debt owed to the automaker that was originally injected into the vendor (target company) in order to save the business. The acquirer has the unique opportunity to acquire the target business at an extremely low valuation – below liquidation value.

Liquidation Value / EBITDA = $25MM / $8.8MM = 2.8x

Liquidation Value / Sales = $25MM/$110MM = .22

A conservative discount of the following assets:

1)Existing accounts receivables from 1^st tier global auto makers = $14MM @ 80% = $11.2MM

2)Appraised value for plant, property, and equipment is (at forced liquidation $10.5MM to orderly liquidation value = $14MM and FMV = $18MM) @50% = $9MM

3)Inventory = $6.5MM @80% = $5.24MM

A conservative estimate of current and long-term fixed assets available for financing is $25.44MM

The acquirer is willing to inject $5MM in new equity capital for this asset purchase.

There is also a potential second transaction in the acquisition of the land (appraised for $20MM) by the acquirer from the family of the target company. This may require an additional $7.5MM-$9MM debt; assuming LTV of 50% for land and a small negotiated discounted purchase price to appraised value.

The Combined New Company The combined business will generate roughly $150MM in revenues and $15MM in EBITDA in the 1^st year.

Within 5-years, the firm expects to generate $233MM in revenues and achieve average gross margins of 17%, and average EBITDA margins between 11%-13%. This will lead to a conservative estimate of $30MM in EBITDA.

Total Debt / EBITDA = $25MM/$15MM = 1.66x

EBITDA / Interest Expense = $15MM/$2.5MM = 6x

The Macroeconomic Environment and Mega Trends The southeast accounts for the majority of the U.S. auto parts industry, and top global automakers continue to migrate operations to the southeast in order to lower labor costs from non-union workforce and lower state taxes. The strong dollar, high commodities, and high transportation costs have caused global firms to re-establish manufacturing within the US, and benefit from close proximity to their end-user customer base. Current geopolitical storms in US-China and EU-China relations make it a corporate priority to regain control of supply chains and onshore manufacturing in safe haven jurisdiction.

Near-shoring manufacturing operations in the USA now will also provide the benefit of riding the eventual start of a decade long weak dollar trend in the near future.

Oxstones Real Estate, www.Oxstones.com CRE@Oxstones.com

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