Metair’s acquisition of AutoZone ‘opportunistic’

Driven by the group’s need to diversify – and presenting synergies that seem to have taken it by surprise.

JSE-listed Metair’s acquisition of financially-distressed AutoZone was opportunistic and driven by the group’s need to diversify.

Metair CEO Paul O’Flaherty said the acquisition of the privately owned automotive parts retailer and wholesaler, which went into voluntary business rescue in June, was unrelated to Metair’s sale last month of Mutlu Akü, its energy storage subsidiary in Turkey, for about R1.95 billion.

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O’Flaherty said the acquisition of AutoZone was “quite opportunistic”, adding that it only went into business rescue on 30 June and Metair started the process to sell Mutlu Akü on 1 March.

“But we knew we needed to diversify and so when we saw this opportunity, that is when we approached the BRPs [business rescue practitioners] – so it just happened simultaneously.

“Once we have sold Mutlu Akü, we have got a high concentration in South Africa as a manufacturer for the OEMs [original equipment manufacturers] and we need to diversify on that.

“The OEMs are good business. We have been in that for 70 years but diversification is key to us,” he said.

“To go into aftermarket parts is what we understand. We think this [the AutoZone deal] is a good synergy.”

Diversification, expansion

O’Flaherty said it represents a new direction for Metair, which hasn’t been involved in retail apart from its First Battery business’s franchised retail distribution network.

He said Metair plans to make sure that, with the management team of AutoZone and some other expertise, it can take advantage of this diversification.

“We think it’s a very good deal, particularly once all the debt is compromised out of it, but obviously we need proper traders in this business and we are comfortable with the management team.”

O’Flaherty said one of the opportunities presented by the transaction is for Metair to expand the automotive aftermarket parts it manufactures and supply them to AutoZone stores.

“The other opportunity that we have spoken about is how do we take a similar model into sub-Saharan Africa because there is a big aftermarket for parts in sub-Saharan Africa,” he said.

“This is all part of the synergy. We have thought about synergies but we haven’t baked [them] into the future models yet and need to work on how we even maximise this further.”

Metair’s side of the deal

O’Flaherty said in terms of the transaction, Metair will:

• Settle R200 million of the Absa debt;
• Pay R15 million to the trade creditors in terms of the business rescue plan that was approved by the creditors;
• Acquire for R1 the sale shares of AutoZone, which has net assets of R485 million and inventory and working capital of R411 million; and
• Inject R75 million of additional working capital to build up AutoZone’s stock.

Criticism

An executive from an automotive company that submitted an unsuccessful bid for AutoZone plus a creditor from another company, both of whom did not want to be identified, were critical of the business rescue process followed by the BRPs and the approved business rescue plan for AutoZone.

They said there was a lack of transparency in the business rescue process, with the BRPs not disclosing information about all the offers made for AutoZone.

A Moneyweb request for a copy of AutoZone’s business rescue plan was refused.

The executive said the approved business rescue plan looks “like a bit of a favour to the bank, the biggest creditor”, and some trade creditors “are going to take a bath”.

“I don’t know how much loyalty they [AutoZone] are going to get from their suppliers if they don’t take care of them in the deal but that is their [the BRPs] approach,” he said.

The executive and creditor also questioned the rates the BRPs are charging for the business rescue after the meeting to consider and approve the proposed business rescue plan also approved a resolution to increase the BRPs fee to R4 200 per hour.

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The creditor said the BRPs should have put details of the offers for AutoZone on the company’s website to allow everyone to see them and be open, honest and direct with the creditors.

He claimed the BRPs had not communicated with creditors since the announcement of Metair’s acquisition and does not know how many cents in the rand creditors will be paid.

The creditor said the BRPs should have issued a statement at the same time Metair released its Sens announcement about the transaction – adding that AutoZone being saved is positive for the retail automotive aftermarket.

“Metair has a balance sheet to pump money in and restock it. This company needs stock. They didn’t have enough stock, which was a big, big problem.”

‘Flaws’ in the rescue plan

The executive said worrying features of AutoZone’s proposed business rescue plan include that:

• It plans to cull roughly 10 branches but this is unlikely to make a significant difference to the financial health of the company and its long-term sustainability;
• It largely blames the economy and Covid-19 for AutoZone’s financial position, but in the same period three major competitors significantly grew their top line;
• AutoZone’s current management vision and outlook will be retained despite this largely leading to the company’s financial distress;
• It fails to address AutoZone’s arguably bloated head office structure;
• It is not in fact a rescue plan but a refunding of the business to allow it to continue doing what it did in the past and protects the bank and management; and
• It makes no reference to how the foreign creditors, largely Chinese, will be protected and how ongoing supply from this vital region will be secured.

In terms of a presentation by AutoZone’s BRPs at the meeting to consider and approve the business rescue plan, it was proposed that concurrent creditors would be paid 2.5 cents to 7.5 cents in the rand.

O’Flaherty not completely happy either

Responding to some of these criticisms, O’Flaherty said Metair will not incur any costs from the closure of any AutoZone branches because the network had already been right-sized for this transaction and no further branches need to be closed.

He said Metair will be acquiring about 180 stores, including the distribution centres, and is “taking over a footprint that should be profitable”.

He said the restructuring plan has already been implemented and has addressed the company’s head office structure.

“So again, we are inheriting an asset that has been right-sized and we need to work with the management team and the assets and get it back to the turnover they should be doing.”

O’Flaherty agreed that the continued loyalty of suppliers is vitally important, and a concern is that supplier creditors will be compromised in terms of the rescue plan.

This is necessary to ensure that AutoZone does not have any creditors when Metair takes it out of business rescue.

“We need to win that loyalty back,” he said.

“That is what we need to do because they are loyal suppliers to this group and hopefully by bringing it out of business rescue, we can give them hope for future trading.”

Metair was down 1.74% on Monday, closing at R12.39 per share

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