Exclusive: 2022 Could Be Even Bigger for Mergers/Acquisitions
All the acquisition activity of 2021 adds up to momentum, and industry analyst John Healy is looking for it to spill over into 2022. He says conditions are showing this year could be even stronger.
Healy — who tracks the domestic tire industry for Northcoast Research Holdings LLC and also writes MTD’s monthly Your Marketplace column — walks us through some of the largest deals of 2021, and covers what's ahead in 2022.
MTD: Merger and acquisition (M&A) activity continued unabated during 2021. How do you view the acquisition strategies of Sun Auto Tire & Service Inc., Percheron/Big Brand Tire & Service and Monro Inc.? Are they similar or different?
Healy: We view each of the three companies as being at various points in their acquisition strategies. In terms of Percheron, which has owned Big Brand for under two years, they have made multiple regional acquisitions in the West and Southwest, sticking with locations in their core geographies.
On the other hand, we have seen Sun Auto Tire expand out of its regional focus in the Southwest, having acquired Hogan & Sons, a seven-store chain in Virginia; three separate acquisitions with stores located in Washington; and Plaza Tire Service, which operates 70 retail locations in Missouri, Illinois, Kentucky and Arkansas.
Regarding Monro, they have had a much more established national brand, although their stronghold area has traditionally been the East Coast and Midwest. In recent years, Monro has started to look westward and has acquired stores in a number of different markets. In 2021 alone, the company made three acquisitions in California and Iowa. Mountain View Tire & Service was the first acquisition of the year, bringing 30 more stores into the Monro family, and Mountain View stores continue to operate under that brand name, rather than switching to Monro’s Tire Choice format and name.
In looking at expansion in the future, newly minted Monro CEO Michael Broderick sees the biggest opportunity in the Southwest, as the company has a limited presence there.
If M&A activity is viewed to be too expensive in the region, Broderick anticipates building greenfield operations in such states as Arizona, Colorado and Texas.
We expect each of these outfits to keep filling in the map and trying to build scale.
From our perspective, we would expect each of these outfits to remain very active in 2022 and look to be bigger — both via organic growth initiatives, as well as continued M&A.
MTD: What are your thoughts on Discount Tire’s acquisition of Tire Rack?
Healy: To be honest, we were very surprised to see this announcement. It made us do a double-take! Seeing an industry leader in e-commerce and an industry leader in installation/retail decide to put their businesses together makes us take notice.
We have long admired both companies and view them as industry leaders, with strong reputations and operational teams. Given their success and market positions, it’s hard for us to be anything but positive about the potential benefits and likelihood of success from this partnership.
As most aspects of commerce and daily life continue migrating online — in addition to younger generations’ inherent preference for e-commerce solutions — it is hard to imagine that online tire sales will not take on increased importance among manufacturers, distributors and retailers in the years ahead We have long-held a view that e-commerce tire retailers like Tire Rack were best-served with creating installation partnerships in local markets, which has largely been the approach.
In this scenario, tire chains would install products and likely raise installation fees to recover lost margin dollars on the product — in essence, pivoting to a model of selling installation rather than the combo model of product and installation today.
We view this move as in line with that view relating to integration of online and physical. However, we did not see this combination as obvious or likely. Given the reach of Discount Tire and its reputation, one could argue that this is a competitive game-changer for the long-term, as it relates to tire retailing. This will be one area of the market that we will be watching closely in 2022.
MTD: Can we expect to see M&A activity continue in 2022 or will economic factors (inflation, interest rates, etc.) change things?
Healy: From our perspective, 2021 was a dynamic year for M&A. We would say M&A and supply chain complexities are the biggest developments in the industry for 2021. Big deals in manufacturing, wholesale/e-commerce and retail all took place. Cooper/Goodyear, Tire Rack/Discount, Monro moving westward and Big Brand Tire’s (acquisition of ) American Tire Depot all were headline-makers.
Will 2022 be a big year? Well, we feel that momentum is often key in making deals happen. Momentum in terms of activity and business conditions seems strong, so we would expect market dynamics relating to M&A activity to be only stronger in 2022. With a year of strong profits, the decision to get bigger and bolder may likely be easier.
The tire world is changing. Operators of smaller, regional chains are going to be faced with the decision to invest in the future or perhaps more effectively monetize their work. This is not an easy decision to make. That said, with prices paid for deals rich and trends in the business healthy, it may make it easier for some of these entrepreneurs to say yes to a deal.
Where will the activity likely reside? We think consolidation among chains or regional dealerships and smaller operators will be the most active area of the market. We see these businesses as having to make big decisions about long-term strategy and competition. These decisions are not easy to make and often are very expensive from an investment standpoint. We see this as pushing activity levels of deals higher in 2022.
Additionally, with the potential for higher interest rates in the future, there could be some who rush or expedite their decision to sell/purchase as the cost of waiting could be expensive. From our view, while rising interest rates are often a muting element to valuations, we do think the initial phase of rising rates could push those on the sideline to move a bit quicker.
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