Description

Discount Auto Parts is one of the Southeast's leading specialty retailers and suppliers of automotive replacement parts, maintenance items and accessories to bot DIY consumers and professional mechanics and service technicians. The Company operates stores located throughout Florida, Georgia, Mississippi, Alabama, Louisiana, and South Carolina. In early August, DAP entered into a definitive agreement to be merges into Advance Auto Parts, a large privately-held company, for $7.50 cash plus 0.2577 shares in the merged company, which will then become a public company renamed Advance Auto Parts, Inc.

The new company will be the number two player in the Auto Parts market, behind Autozone (AZO). The company will operate 2420 stores in 38 states. Pro forma TTM revenues would be over $3.0 Billion, and EBITDA of $243 Million. Total debt net of cash would be $950 million. Total diluted Advance shares would be 33.8 million.

The company values the .2577 share of Advance Auto stock at between $7.50 and $9.50, for a total DAP consideration of $15-17. This valuation is based on a 7-8X TTM pro forma EBITDA.

Based on these conservative valuations, I had planned to submit DAP as a value play at the beginning of September. Given the events of the last 6 weeks, and DAP's price rise, I had vacillated as to whether to submit it. However, further review of the valuations of the future Advance Auto's competitors, AZO and PBY, I have decided that it still qualifies as such a value play. AZO's P/EBITDA is 12.07; PBY's P/EBITDA is 9.14. Splitting the difference between these two gives Advance a P/EBITDA of 10.60. This would give the stock portion of the DAP consideration a value of 12.59, and a total consideration of $20.09.

For those (like me) concerned that the valuations of stocks like AZO might not persist, you can short them as a "hedge". Another member of the Club had submitted AZO as an investment idea, and recently recommended hedging or taking profits on the very profitable purchase. Also, inasmuch as Advance will be the number two auto parts supplier, I would suggest that there may be some portfolio adjustments as managers rebalance their portfolios by buying advance and selling AZO etc.

Catalyst

Merging into Advance Auto and subsequent public stock listing.

Low P/EBITDA versus its peers.

Creation of number two auto parts supplier.