For those of you who read my article yesterday, you will know that I shy away from making predictions about acquisitions. As I am writing this piece I feel a bit silly as this is the second day in a row that I am predicting an acquisition.
That said, I don’t have influence over these companies. The company that I am focusing on today is Uni Select (TSX: UNS), which specializes in automotive products, paint and related products for motor vehicles.
The company has a dealer network across Canada and the United States with more than 1,100 part distribution stores and 4,000 affiliated mechanical shops in Canada alone.
The company’s operations and the low share price make it a candidate to be acquired by the likes of Canadian Tire. The company’s strong operational income and acquisition growth strategy.
Strong operational income
Operating income describes income excluding one-time gains or losses. Operating income is a better measure of how well a company is performing, as it is derived directly from the company’s main line of business.
For Uni Select, it faced $15 million in other income expenses for fiscal 2018, which resulted in pre-tax income of $45 million. Adding back the $15 million in other income expenses would result in pre-tax income of $60 million, which would also increase the company’s net income.
From fiscal 2014 to fiscal 2018, the company’s operating income has remained greater than $70 million with a peak of $90 million in fiscal 2016 and a trough of $71 million in fiscal 2014.
The strong operating income has resulted in operating cash flows of $95 million in fiscal 2018.
Acquisition growth strategy
The company acquired The Parts Alliance in fiscal 2017. The Parts Alliance is the second largest aftermarket parts distributor in the United Kingdom with 161 corporate stores and 38 affiliated locations in England, Scotland, Wales and Ireland.
Uni Select purchased this company on a cash-free debt-free (CFDF) basis for USD $265 million, which means that The Parts Alliance is responsible for paying off all the debts and it gets to keep the excess cash.
From Uni Select’s point of view, this deal was fully funded with debt, hence the company’s long-term debt and capital lease agreements being in excess of $400 million for fiscal 2017 and fiscal 2018.
The company secured a USD $635 million commitment from National Bank of Canada and Royal Bank of Canada. This is further divided into a USD $100 million term facility and an operating facility up to USD $525 million.
At the date of closing, the company had USD $168 million undrawn.
Summary
Uni Select is a solid company that’s being unfairly treated by the market.
With its share price tumbling 40% since the beginning of the year, investors should be excited to buy a good company at a discount.
Uni Select’s strong operational income (that has been above $70 million in the past five fiscal years) and its acquisition growth strategy make it well positioned to deliver significant returns for investors.
And as an added bonus, it’s definitely on the radar for a company such as Canadian Tire that is looking to expand its business.
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