Hi-Lo, Discount Auto merge into one lane

Discount Store News, Nov 3, 1997 by Richard Halverson

HOUSTON -- Just as it was getting

back on its feet financially, Hi-Lo

Automotive agreed to merge itself out of

existence into Discount Auto Parts, Lakeland, Fla.

As a result, the automotives aftermarket now has a chain

of 598 stores with annual revenues of about $700 million.

This makes Discount Auto Parts, a 411-unit retailer--mostly

in Florida--a major player in its field.

DAP won't be getting a lot of cash in the deal, however, since

Hi-Lo had only about $600,000 in cash on hand at the end of

September. In addition, Hi-Lo's cash flow was a negative

$264,000, and DAP will assume about $48 million in Hi-Lo debt.

What DAP will be getting,

however, in a stock swap valued

at about $36 million, will

be a quick entry into the commercial

market and a quick

entry into Texas.

About 35% of Hi-Lo sales

are from commercial installers,

a market that DAP intends

to enter early next year.

In announcing the sale,

DAP chairman and ceo Peter

Fontaine said, "Hi-Lo brings

to us good market share and

the ability to quickly and

cost-effectively expand our

geographic reach.

"With its large customer

base and strong `do-it-yourself' tradition,

Texas, has

been in our sights for some

time and represents a logical

geographic expansion of our

existing store base."

Fontaine also said the

acquisition will speed up his

plans to enter commercial

sales in its original markets.

DAP president Bill Perkins

will remain in the same position

in charge of the combined

companies. Fontaine

remains as chairman and ceo.

The acquisition includes:

* A call center in Houston

for taking orders from commercial

garages. To handle

calls from its home markets

in Florida, Georgia and

Mississippi, DAP intends to

open a second call center in

Lakeland.

* Hi-Lo's 390,000-sq.-ft. distribution

center in Houston

and 187 stores, mostly in

Texas but also in Louisiana

and California.

DAP intends to close Hi-Lo's

Houston headquarters

and transfer some buyers

and others of the 120 staffers

to Lakeland, Hi-Lo ceo Mike

Young said. Top executives

will depart, however, when

the deal closes in the next

few months, sometime in

February 1998. Hi-Lo rank

and file will remain in place,

he added.

Discount Auto Parts immediately

will begin remerchandising

the Hi-Lo stores

to its format, Young said,

and change the name to DAP

in 12 to 18 months.

Hi-Lo closed eight stores

since posting a $59 million

net loss last year, mostly for a

write-off of goodwill on its

books and a charge off for

closing stores. Next year, it

planned to open only six to

eight units.

Store size is a good fit, Young

said, since the 7,000-sq.-ft Hi-Lo

average is close to the

6,800-sq.-ft. DAP prototype.

The merger agreement values

Hi-Lo stock at about

$3.37 per share but could go

as high as $3.88, depending

on the value of DAP stock

when the deal closes.

Approval is needed from

shareholders of both companies,

as well as Hart-Scott-Rodino

clearance from an

anti-trust standpoint.

Sales for Hi-Lo totaled

$248.6 million for the year

ended Dec. 31, 1996. In the

fiscal year ended June 3,

1997, DAP logged sales of

$405.2 million.

For the quarter ended

Sept. 30, Hi-Lo reported a

1.4% increase in sales to

$65.3 million from $64.4 million

a year earlier. Same store

sales gained 2.8%.

It posted a net profit of $1.3

million, compared to a net

loss of $51.7 million in third

quarter 1996.

That loss pushed shareholder

equity into a hole, a

negative $8.5 million, Hi-Lo

noted in its third quarter 10-Q.

In contrast, DAP shareholder

equity stood at $134

million at the end of its first

quarter of fiscal 1998, ended

Sept. 2, 1997.

Hi-Lo had only $5.8 million

unused on its credit

facility and owed $57 million.

In comparison, DAP

had $100.6 million in available

revolving credit and

owed about $75 million.

For the quarter ended Sept.

2, DAP sales rose to $109.7

million from $90.7 million a

year earlier. Operating income

increased to $12.8 million from

$11.5 million.