San Antonio David Roberts, Managing Director FOCUS LLC 1133 20 - - PowerPoint PPT Presentation

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San Antonio David Roberts, Managing Director FOCUS LLC 1133 20 - - PowerPoint PPT Presentation

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Collision Repair: Private Equity, Consolida7on, Implica7ons Presentation for: San Antonio David Roberts, Managing Director FOCUS LLC 1133 20 th Street NW May 2015 Suite 200 Washington, DC 20036

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Presentation for:

David Roberts, Managing Director FOCUS LLC 1133 20th Street NW Suite 200 Washington, DC 20036

Collision ¡Repair: ¡Private ¡Equity, ¡ Consolida7on, ¡Implica7ons ¡

San ¡Antonio ¡

May ¡2015 ¡

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Disclaimer

§

This presentation was prepared by FOCUS Investment Banking LLC exclusively for the benefit and internal use of the Company, as herein defined, in order to discuss, on a preliminary basis, the feasibility of a possible transaction or transactions. This presentation is incomplete without reference to, and should be viewed solely in conjunction with, the oral briefing provided by FOCUS. The presentation is proprietary to FOCUS and may not be disclosed to any third party, other than the Company’s advisors, or used for any other purpose without the prior written consent of FOCUS.

§

The information in this presentation is based upon management forecasts and reflects prevailing conditions and our views as of this date, which are accordingly subject to change. In preparing this presentation, we have relied upon and assumed, without independent verification, the accuracy and completeness of all information available from public sources

  • r which was provided to us by or on behalf of the Company or which was otherwise

reviewed by us. In addition, our analyses are not and do not purport to be appraisals of the assets, stock or business of the Company. Even when this presentation contains a kind of appraisal, it should be considered preliminary, suitable only for the purpose described herein and not be disclosed or otherwise used without the prior written consent of FOCUS.

§

Securities transactions conducted by FOCUS Securities, LLC, an affiliated company, registered Broker Dealer and member FINRA/SIPC.

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Who We Are

  • Middle market investment bank since 1982
  • Specializing in transactions between $5 and $300 million
  • Serving sellers, buyers, and investors
  • Delivering a balanced mix of sell side and buy side M&A and

corporate finance

  • Team includes 24 bankers, 19 senior advisors, three

research analysts, five support—total staff of 51

  • Offices—Washington DC HQ, Atlanta, and Los Angeles
  • Securities transactions conducted by FOCUS Securities

LLC, an affiliated company, registered broker/dealer, and member FINRA/SIPC

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David Roberts

  • David Roberts and his partner, Matthew Ohrnstein, created the idea,

the business plan and raised the first $120 million of capital for Caliber Collision beginning in 1995. Originally an attorney, largest franchisee of Chuck E. Cheese’s, securities analyst and money manager and investment banker.

  • Investment banker for 11 years with FOCUS.
  • Lead a team of seven bankers focused on Automotive Services,

leading with collision repairers but also mechanical providers, quick- lube, paint jobbers, parts distributors, equipment and allied firms

  • Graduate of Duke, MBA and JD from University of California, Berkeley
  • Domiciled in SF Bay Area

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Agenda

  • Consolidation
  • Private Equity
  • Implications

Focus ¡Investment ¡Banking ¡LLC ¡ 5

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News Flash from 1995!

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Collision Repair Ecosystem

  • External

– Uncertainty of the current macroeconomic conditions

  • Interest rates, China’s economy, Ebola

– US economy recovery uneven

  • Consumers have relatively less money to spend than

investors – Technology is accelerating change in vehicles, insurance, marketing, communications, processes – Globalization of vendors, manufacturers, technology – Private equity investment in every sector of industry

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Collision Repair Ecosystem

  • Industry Conditions

– Continued declines in accident frequency and number of repairable claims

– Average severity growing less than inflation – Fleet is older and need replacing which increases total losses – DRP share of repairs is increasing – Changes in marketing relationships with insurance companies – Increasing complexity in repairs, increasing investment required – Increasing management skills required

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Concentration Among Insurers

Source: ¡ ¡Na7onal ¡Assn. ¡of ¡Insurance ¡Commissioners; ¡SNL ¡

¡ ¡ ¡ ¡ ¡ ¡ ¡ ¡2013 ¡ ¡ ¡ ¡ ¡ ¡ ¡ ¡ ¡ ¡2009 ¡ ¡ ¡ ¡ ¡ ¡ ¡ ¡ ¡ ¡2005 ¡ ¡ ¡ ¡ ¡ ¡ ¡ ¡ ¡ ¡1999 ¡ ¡% ¡change ¡

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Auto Physical Damage Market

  • Largest insurers gain market share
  • Top 5 control more than 50%
  • Changes from 1999 to 2013

– The top 10 insurance companies increased combined market share by 10 points – Top 67% of market has 6 fewer insurers – State Farm and Allstate, while down slightly during this time, still command over 28% of the market – BUT GEICO has now surpassed Allstate’s market share – Progressive has more than tripled its share

10 Focus ¡Investment ¡Banking ¡LLC ¡

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$31 Billion Industry Today

  • Consolidators

– ABRA, Caliber, Gerber, Service King

  • Other MSOs

– 48 MSOs >$20 mm – 73 MSOs > $10-20 mm – 90-120 MSOs - $5-10 mm

  • Dealers

– 22 Multishop Dealers (MSDs)> $20 million – 61 Multishop dealers - $10-20 mm – 5,706 single dealer shops

  • 4 Multi Location Networks (MLNs)

– CARSTAR, FixAuto, MAACO, ABRA franchisees

  • Rest of industry

– 22,000 independent non- dealer shops

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34,000 Total Shops

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5,000 Important Shops

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1,475 MSD and MSO Shops

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930 Consolidator Shops

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Industry is Contracting

  • 52,000 ¡shops ¡have ¡disappeared ¡since ¡1980 ¡
  • 19,000 ¡shops ¡have ¡disappeared ¡since ¡1998 ¡
  • There ¡are ¡fewer ¡than ¡34,000 ¡shops ¡today ¡
  • Another ¡20,000 ¡may ¡disappear ¡by ¡2030 ¡
  • Shops ¡owners ¡are ¡uncertain ¡and ¡afraid ¡
  • How ¡many ¡shops ¡does ¡industry ¡really ¡need? ¡

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Best Shops Today

  • Larger
  • More productive
  • Better managers
  • Better systems
  • Higher margins
  • Organized around systems
  • Part of an MSO or Consolidator

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Consolidation

  • Aggressive acquisition and organic growth by the consolidators and

MSOs

  • Larger MSOs improving execution on decreased cycle time, average

cost of repair, LOR, loss adjustment expense (LAE) and customer satisfaction/KPI scores

  • MSOs are differentiating themselves through initiatives such as self-

management, electronic auditing, call centers, capacity utilization management, and geographic coverage

  • Aggressive MSO selling, marketing and branding of their competitive

value propositions and performance

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Accelerating Acquisitions

  • Large acquisitions completed in 2014 (all revenues are estimated)

– ABRA

  • Wilburn, CCA – 38 shops, $95+ million in revenue
  • True Quality – 13 shops, $25+ million in revenue
  • Collision Center of America – 22 shops, $45+ million in revenue

– Caliber

  • Haddocks – 5 shops, $26+ million in revenue
  • Pohanka, Craftsman – 25 shops, $90+ million in revenue

– Service King

  • Sterling – 62 shops, $215+ million in revenue
  • Marco’s – 7 shops, $27+ million in revenue
  • Car West – 6 shops, $45+ million in revenue
  • Kirmac – 12 shops, $34+ million in revenue

– Gerber

  • Collision Revision -24 shops, $50+ million in revenue
  • Collex – 22 shops, $46+ million in revenue
  • Champs – 7 shops, $37+ million in revenue
  • $800 million of revenue – 2.5% of entire industry!

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Consolidator Growth 2013-2014

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Consolidator Consolidator (US only Shops) (US only Shops) ¡ Year Year End End 2012 2012 ¡ Year Year End End 2013 2013 ¡ 2013 2013 Additional Additional Shops Shops ¡ 2013 % 2013 % growth growth ¡ Year End Year End 2014 2014 ¡ 2014 2014 Additional Additional shops shops ¡ 2014 % 2014 % growth growth ¡

ABRA ABRA ¡ 81 ¡ 132 ¡ 51 ¡ 63% 63% ¡ 205 ¡ 73 ¡ 55% 55% ¡ Boyd Boyd ¡ 180 ¡ 220 ¡ 40 ¡ 22% 22% ¡ 282 ¡ 62 ¡ 28% 28% ¡ Caliber Caliber ¡ 112 ¡ 158 ¡ 46 ¡ 41% 41% ¡ 232 ¡ 74 ¡ 47% 47% ¡ Service King Service King ¡ 63 ¡ 104 ¡ 41 ¡ 65% 65% ¡ 211 ¡ 107 ¡ 103% 103% ¡ Total Total ¡ 436 ¡ 614 ¡ 178 ¡ 41% 41% ¡ 930 ¡ 316 ¡ 51% 51% ¡

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Markets are Rapidly Consolidating

  • Consolidators are focused on covering top 125 markets in US
  • Market by market

– Unconsolidated markets

  • New York
  • Boston

– Consolidating markets

  • Chicago, IL
  • Charlotte, NC

– Consolidated markets

  • Denver, CO
  • Phoenix, AZ

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Denver Market

  • $220-250 million: Denver MSA Collision Repair Volume

– $120 million+: Current capacity of these 33 Consolidator shops and one remaining smaller 4 shop MSO – 100% of Denver MSA is within 20 minutes drive time of these 37 MSO shops

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260 Shops in Denver Market

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Source: ¡IDSI ¡

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Denver Market

13 ¡Caliber ¡shops ¡

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Source: ¡IDSI ¡

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Denver Market

9 ¡ABRA ¡shops ¡ ¡ ¡ ¡ ¡ ¡ ¡ ¡ ¡ ¡ ¡2 ¡Service ¡King ¡Shops ¡

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Source: ¡IDSI ¡

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Denver Market

9 ¡Gerber ¡shops ¡4 ¡shops ¡in ¡last ¡remaining ¡MSO ¡ ¡ ¡ ¡ ¡37 ¡total ¡MSO ¡shops ¡ ¡ ¡

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Source: ¡IDSI ¡

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How a Consolidator Builds A Market

  • Start by buying a platform

– Market leading volume, locations – Management capable of leading market – Very strong EBITDA %

  • Additional strong MSOs as “bolt-ons” or “tuck-ins”

– Significant volume, EBITDA margins, management

  • Add individual shops with desirable characteristics

– Location, management, extra capacity

  • Add underperforming individual shops that expand geographic

coverage or capacity

  • Develop “Brownfields” – lease and build out former shop or

warehouse

  • Build “Greenfields” – work with developer to lease and build

27 Focus ¡Investment ¡Banking ¡LLC ¡

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Insurers Reward MSOs

– Insurers with larger market shares are concentrating repairs with MSOs – Best DRP networks utilize MSOs that have proven their capabilities across entire markets – MSOs are expanding to meet insurers desires for market coverage/capacity

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State Farm DRP Map

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Source: ¡IDSI ¡

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GEICO ARX Map

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Source: ¡IDSI ¡

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Private Equity Described

  • Investment management vehicles that raise large pools
  • f money invested by pension funds and other

institutions and wealthy individuals

  • Less regulated than mutual funds or investment advisors
  • Similar to but not the same as:

– Family offices – Venture capital firms

  • Largest is more than $75 billion
  • Small ones can be $25 million
  • More than 2000 of them
  • Most focus on specific industries or types of investments

31 Focus ¡Investment ¡Banking ¡LLC ¡

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Private Equity Described

  • Big firms focus on big deals in large variety of industries -

$500 million and up – Examples: Blackstone, Carlyle and Hellman&Friedman

  • Smaller firms like niche industries

– Example: Roark Capital invests almost exclusively in multi-location businesses

  • Firms often team up to buy businesses
  • Most firms have finites lives – form partnerships that

have to get all $ invested, grown and harvested in 7-10 years

  • Some firms have an infinite life and tend to invest for

returns over longer periods

32 Focus ¡Investment ¡Banking ¡LLC ¡

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PE Deal Structures

  • Investment Process

– Identify an industry – Find many prospects – Kiss a lot of frogs, finally invest in one

  • Usually buy 100% but sometimes less
  • Cash out management but give/require key managers
  • pportunity to co-invest
  • Borrow money against earning capacity of acquired

business – Often 3:1 or more multiple of equity

33 Focus ¡Investment ¡Banking ¡LLC ¡

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Growth Process

  • Use borrowed money to invest in:

– Better systems, training, managers, marketing – Acquire additional firms that complement or leverage existing investments

  • Goals: Increase the EBITDA of the entity
  • Refinance loans at lower rates
  • Continue growing revenues, market share, margins

34 Focus ¡Investment ¡Banking ¡LLC ¡

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Liquidity

  • Harvesting the Profits
  • Dividend out excess cash not needed for growth
  • Sell to another private equity fund
  • Sell to a strategic investor, public or private
  • Take entity public in an IPO
  • Gradually liquidate position
  • Return profits to investors and managers

35 Focus ¡Investment ¡Banking ¡LLC ¡

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Implications for Jobbers

  • Water and other things flow downhill
  • Consolidation in collision repair helps drive jobber consolidation
  • Private equity and public companies drive jobber consolidation
  • Multiple impacts

– Shrinking margins – Consolidators pay just service fees – Shrinking base of customers – Remaining customers need – and demand – more from jobber

  • Opportunities for growth
  • Opportunities for exiting industry

36 Focus ¡Investment ¡Banking ¡LLC ¡

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Jobber Alternatives

  • Grow and thrive
  • Grow and sell
  • Sell
  • Stay the course
  • Run-off the business

37 Focus ¡Investment ¡Banking ¡LLC ¡

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Value Added Services

  • Process improvement

– Lean process – Teams – KPI measurement and compliance – New technologies

  • Information clearinghouse – Who’s looking to exit, grow?

Job placements, consolidator activity, etc.

  • Consultant to shops with manufacturers’ programs

– Analysis of discounts vs pre-bates

  • Assist with financing

– Banks, SBA, credit extension?

38 Focus ¡Investment ¡Banking ¡LLC ¡

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Key Assets

  • Strong financial base
  • Great accounting system
  • Know where your margins come from
  • Sufficient working capital to optimize gross margin
  • Diversification

39 Focus ¡Investment ¡Banking ¡LLC ¡

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Thriving in a Consolidating Market

  • Scale is the game everyone is playing
  • International and national consolidators have huge scale

– Spread their costs over hundreds of locations, constantly learning, improving, creating deeper and deeper relationships, building efficient and data rich systems

  • Regional jobber MSOs have multi-market scale, across

multiple MSAs

  • Large single market jobbers
  • Smaller single market jobbers

40 Focus ¡Investment ¡Banking ¡LLC ¡

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Growth Alternatives

  • Acquire volume
  • Merge with a competitor
  • Develop new locations
  • Diversify

– Ancillary product lines – Ancillary industry lines

  • But you need a PLAN – a

written plan with measurable financial goals

41 Focus ¡Investment ¡Banking ¡LLC ¡

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Then

  • Execute

– Even with a good plan, things go wrong – Expect hiccups – Resilience in face of adversity is mark of good management

  • Evaluate
  • Revise
  • Repeat

Focus ¡Investment ¡Banking ¡LLC ¡ 42

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Mergers

  • Finding a partner
  • Negotiating the relative values
  • Management
  • Equity issues
  • Debt issues

43 Focus ¡Investment ¡Banking ¡LLC ¡

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Selling

  • Get organized
  • Have a Plan
  • Use an Intermediary
  • Put together a Team
  • Conduct an Auction Process

44 Focus ¡Investment ¡Banking ¡LLC ¡

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Preparing to Sell

  • Evaluate

– Evaluate your market – Realistically assess your resources – Articulate your goals – Consider your alternatives – Assess the risks of each

  • Decide

– Choose the alternative that best balances your tolerance for risk and your desire for rewards

  • Prepare

– Get your house in order – Write up the specific plan – Put together a team – Establish a timetable

  • Process

– Run a professional process – Use an intermediary – Bring more than one buyer to the table

Focus ¡Investment ¡Banking ¡LLC ¡ 45

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Putting Your House in Order

  • Structure

– S Corp or LLC, not C Corp because of tax issues – Control of entity

  • Finances

– Everything on the books – Audited or reviewed statements (GAAP compliant) – CPA who is knowledgeable and responsive

  • Management

– Identify and prepare succession managers who will be able to run the business for the buyer – Create a culture and processes that look like the potential buyer’s culture and processes

  • HR

– Squeaky clean and organized – No outstanding HR issues (back pay, vacation pay, unresolved WC claims, etc.)

  • Systems and certifications

– Measuring, paint, management systems up to date and staff qualified

Focus ¡Investment ¡Banking ¡LLC ¡ 46

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The Sale Process

  • You have a team to run a process so you can run the business
  • The process brings multiple buyers to the table, that’s what

determines fair market value

  • Team tasks

– Intermediary helps prepare blind summary, Confidential Investment Memorandum and target list of prospective buyers – Contacts prospective buyers with blind summary – Obtains NDAs – Requests offers – Owner evaluates and choose preferred offer – Intermediary obtains Letter of Intent from preferred buyers – Preferred buyer conducts due diligence – Intermediary and owner negotiate final terms – Lawyers prepare a Purchase and Sale Agreement – Close the transaction

Focus ¡Investment ¡Banking ¡LLC ¡ 47

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Time is Critical

  • Consolidation is happening more quickly than you think.
  • Engaging with prospective buyers is a process
  • Once you decide to move, everything takes longer than you think
  • And delay kills deals
  • 75% of all businesses that are put up for sale are never sold. Why?
  • Seller couldn’t provide what buyer needed
  • Seller couldn’t negotiate a satisfactory price
  • Seller died before the closing

Focus ¡Investment ¡Banking ¡LLC ¡ 48

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www.focusbankers

For the latest, detailed FOCUS information, visit our website:

  • Summary of publicly announced transactions
  • List of currently active sectors
  • Detailed biographies of our professional staff
  • Office locations and contact information
  • Archives of the monthly newsletter, publications, and sector

research

  • Easy online subscription to free monthly newsletter
  • Form for submitting online inquiries

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MID ATLA LANT NTIC REGI GION ON

FOCUS Investment Banking LLC Headquarters 1133 20th St. NW Suite 200 Washington, DC 20036 202.785.9404 202.785.9413 (fax) ¡

SOUT OUTHE HEAST REGI GION ON

FOCUS Investment Banking LLC Atlanta Office 3353 Peachtree Rd. NE Suite 1160 Atlanta, GA 30326 404.504.8620 404.814.9141 (fax) ¡

WE WESTERN N REGI GION ON

FOCUS LLC Los Angeles Office 355 S. Grand Avenue Suite 2450 Los Angeles, CA 90071 213.943.1395 213.943.1397 (fax)

Securities transactions conducted by FOCUS Securities LLC, an affiliated company, registered Broker Dealer member FINRA/SPIC 50

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