In what is shaping up to be one of the biggest industry stories to come out of 2007, recycling giant LKQ Corporation announced in July it has signed a merger agreement to acquire auto parts distributor Keystone Automotive Industries, Inc. The $48 per share cash deal will join the nation's largest parts recycler and distributor (though at press time the deal still needed approval from Keystone shareholders). Considering the nearly 30 percent share of the alternative parts market the transaction will give the merged companies, the deal ultimately could have a tremendous impact on where shops acquire their parts and how much they pay.
Repairer fallout
We contacted both LKQ and Keystone, but neither could comment on the transaction. Instead, LKQ pointed us to press releases and a conference call the company held for the media. During that call, LKQ President and CEO Joe Holsten said LKQ looked at the acquisition as an "opportunity to substantially accelerate our goal of being a one stop shop for the collision industry." That one stop shop should help increase the use of non-OEM parts, he added. "We believe the merger will allow for better availability and higher utilization of alternative parts in the repair process," he says.
The mention of insurers and the use of aftermarket parts immediately caught the attention of repairers, some of whom believe the relationship between the two companies and insurers, along with the creation of a "single store," will put even more pressure on shops to move away from OEM parts.
Several repairers, who asked to remain anonymous due to DRP arrangements, told us the consolidation of parts resources could help draw closer the day when insurers take over parts procurement.
"Hey, if they know they can get the lowest price and all the parts they need from a single place, they may as well just order (those parts) themselves. Especially if they can sit down with the supplier and work out deals. They'd be crazy not to," says the manager of an Austin, Texas, shop.
Other industry members say it's simply too early to accurately gauge what effect the merger will have on shops. Dave McClune, executive director of the California Autobody Association (CAA), says, "Keystone was already well situated. They have a lot of good people working for them, and they've been very profitable. I'm going to assume this could only assist them in being a better company."
Don Kott, owner of Tucson Body and Frame in Tucson, Ariz., says the merger has real potential to either raise or lower parts prices. "They could try to raise prices closer to OEM prices in order to make more money, or this could really force OEMs to lower theirs."
Kott notes that increased competition already is forcing OEMs and other national parts distributors to offer better service and prices. The merger could "make competition even more fierce," he says. One national distributor has begun offering a greater selection of parts. "A lot of OEMs are working with dealers to get more parts to shops. They want dealers to be able to overnight parts to shops."
Whatever the impact, LKQ dismisses any notion the merger will give it and Keystone monopoly-like power or excessive influence over the market. During the conference call, Holsten noted LKQ corporate lawyers had reviewed the merger for potential anti-trust issues and added the nature of the current parts market would make it extremely difficult for any one company to exercise too much influence.
That's little consolation for some wary repairers who only see another large corporation helping shape their business environment while their own influence over the industry seems to wane even further.
Making of a merger
LKQ, of course, takes a much brighter view of the deal, as does Keystone. Holsten praised the agreement, noting that it provides significant value to shareholders of each company and benefits both by allowing them to leverage the other's strengths. Keystone offered similar praise.
In a press release, Keystone President and Chief Executive Officer (CEO) Rick Keister notes, "Keystone's aftermarket product offerings are a perfect fit with LKQ's leading presence in the recycled parts business. The Keystone-LKQ merger presents unique opportunities to provide a comprehensive program of aftermarket, remanufactured and recycled parts to our customers."
The merger, says Holsten, gives LKQ a footprint for the selling of aftermarket parts in the U.S. and Canada and will combine Keystone's 137 distribution centers to LKQ's 130 (though Holsten says some centers may need to be closed, especially those that serve the same region). LKQ plans to leverage Keystone's brand recognition by eventually placing all of LKQ's aftermarket offerings under the Keystone name. LKQ says the transaction effectively creates a "vehicle alternative replacement parts business" whose combined annual revenues should approach $1.8 billion.
Final word: When the fog clears
LKQ says it will spend most of 2008 integrating its business with Keystone. It does expect to realize savings on the order of $25 million to $30 million in areas such as warehousing and distribution, but not for several quarters.
However, the merger doesn't rule out their making any further acquisitions anytime soon.
The merger itself needs to pass through several hurdles before it can be completed. Mainly, it is subject to approval of Keystone shareholders. One major shareholder has criticized the transaction, saying Keystone could have demanded more than its $811 million asking price.
Keystone's board of directors unanimously recommended that Keystone shareholders approve the merger, and analysts expect the transaction to be completed by the fourth quarter of 2007.
That means when 2008 dawns, a new giant will rise in the industry and begin taking steps that eventually should be felt across the aftermarket landscape.
