Advance and Discount to form new No. 2 - Advance Auto Parts' to buy Discount Auto Parts - Brief Article

DSN Retailing Today, August 20, 2001 by Katherine Hutchison

ROANOKE, VA. -- Advance Auto Parts' pending acquisition of rival Discount Auto Parts would strengthen its position as the No. 2 aftermarket retailer and more closely nip at the heels of No. 1 player AutoZone, especially in the southern United States. The proposed merger, announced Aug. 7, would make Advance a powerhouse in the region, most notably in Florida, where Lakeland-based Discount Auto has its largest presence.

Once it clears regulatory hurdles, the cash and stock purchase--valued between $15 to $17 for each Discount Auto share, or about $520 million, including debt--is expected to be final in November. Combined, the two companies operate 2,420 stores in 38 states and expect to bring in nearly $3 billion annually in revenue once the merger is complete, still trailing AutoZone with about 3,000 stores and $4.5 billion in annual revenue.

"This bolsters Advance's market share and steps up AutoZone's competition in many markets," said AutoZone analyst Scott Nelson of Lehman Brothers. But he believes AutoZone's new management, which continues to impress Wall Street with better-than-expected quarterly results, is more than up to the task.

A relatively small player, Discount Auto operates 667 stores throughout Florida, Georgia, Mississippi, Alabama, Louisiana and South Carolina and had $662 million in revenue for its fiscal year ended in June. Advance ended the second quarter with 1,765 stores, mostly in the East and Midwest, plus Puerto Rico and the Virgin Islands.

The companies share a closely held, Southern-based culture and roots in family ownership. A corporation controlled by the Fontaine family owns 25% of Discount Auto, and Peter Fontaine is the company's chairman and ceo. Privately-held Advance, formed in 1929, was sold in 1998 to investment firm Freeman Spogli, which controls about half of its stock. Advance Holding Corp. is the parent company The new company will be renamed Advance Auto Parts Inc. and file an initial public offering. Discount Auto shareholders will control about 13% of its stock.

In a conference call Aug. 8, Fontaine noted Advance's "record of successfully integrating acquisitions," including Western Auto, purchased from Sears, Roebuck & Co. in 1998, and most recently, Carport Auto Parts, a chain in Alabama and Mississippi.

"Their customer is similar to ours," said Advance ceo Lawrence Castellani, who will remain in his post. The two companies place a strong value on retaining personnel, he added. He said Discount Auto will complement Advance's position in its current markets, and the company's brand awareness in Florida "creates exciting crossbranding opportunities."

Discount Auto's stores outside Florida will be converted and integrated into the Advance format and renamed within one year after purchase. In the Florida market, the conversion of Discount Auto's 438 stores will take place over four years, Castellani said. First the merchandise mix will be aligned, followed by conversion of store systems; stores will then be sequentially remodeled to the Advance format. About 50 stores will change over in the first year, 100 stores in the second and third years, and the remainder the following year.

Castellani would not rule out some store closings, though he declined to go into detail. "We plan to rationalize all assets in the combined organization."

Advance's annual sales grew at a compound rate of 32.6% over the past decade, and its store count grew by 25.6% in the same period, said president and cfo Jim Wade. The company opened 140 stores last year. In its second quarter ended July 14, same-store sales rose 6.8%. Commercial business was the chief driver of growth in the last several years, he said.

In cutting Advance's debt rating on the news, Moody's Investor Service analyst Michael Rowan cited short-term risk from Discount Auto's low margins, and the challenge of integrating a company with Discount Auto's strong internal culture and low-price image. It lauded Advance for mitigating risk by moving slowly on the Florida conversions.

Although Rowan somewhat sneered at the aftermarket as a "stagnant retail segment," don't tell that to Fontaine, who will become an Advance board member. "The industry is on fire," he said. "After a few years of anemic growth, the economic slowdown is helping the DIY and DIFM side of the business as people hold onto their cars longer."

ADVANCE'S DISCOUNT TUNEUP
The numbers behind the deal
$3 billion    Aggregate annual revenue (Deal
              makes Advance Auto the
              nation's 2nd largest
              aftermarket parts retailer
              behind AutoZone.)
$267 million  Amount tendered in cash and
              stock *
2,420         Combined store count (in 38
              states)
(*)The deal will result in Advance Auto Parts
being a public company
Source: Company reports and DSNRT research