Harris Williams recently advised Highline Aftermarket, a portfolio company of The Sterling Group, on its sale to Pritzker Private Capital. Highline is a leading national distributor of automotive aftermarket products, focused primarily on liquids, lubricants, and other consumable aftermarket maintenance products. Here, we discuss what makes the automotive aftermarket segment appealing, the factors differentiating Highline from other companies, and our advice for buyers active in the segment.
Why is this an appealing space?
Kidd: The automotive aftermarket segment's stability through economic uncertainty makes it an attractive, recession-resilient opportunity. Most companies in the space experienced a short-term impact from the economic shock of the pandemic but then had a very quick recovery and return to normal volumes. The automotive aftermarket has always been resilient through economic cycles, and the performance of the segment through the pandemic has only helped to prove this out.
Conner: In a recession, people defer car purchases but still need to travel via car. Older cars require more maintenance to keep running, which drives aftermarket parts demand. It's also a highly fragmented segment, with many opportunities for investment in top assets executing successful consolidation strategies.
What made this an especially attractive company?
Baltimore: Highline is a national distributor with 15 distribution centers and eight state-of-the-art manufacturing facilities. It offers a robust portfolio of national brands as well as Highline-owned and licensed brands, private-label goods, in-house chemical blending and packaging, and a wide range of other original equipment replacement products. The company serves the do-it-yourself and do-it-for-me market segments. Also, it maintains a multi-channel sales strategy, selling through retail, warehouse distributors, installers, and e-commerce channels. This balanced distribution strategy benefits from almost any buying patterns occurring: As the pandemic drove people to shop online, Highline benefitted from its distribution through Amazon, Walmart.com, and other e-commerce sites.
Conner: Highline has been very intentional about its strategy to address different parts of the aftermarket. For example, it represents small manufacturers to large customers that those manufacturers could not otherwise access. It also takes large manufacturers' products to small distribution points. And because of the breadth of its product offering, it can bring retailers a comprehensive set of products for the category. This ability to navigate the complicated web of the automotive aftermarket supply chain, effectively serving a wide range of types of customers and suppliers, is truly unique in the industry.
Gillam: The company has also built an impressive national distribution network that makes it easy to add new product categories and funnel more volume through the system. Its manufacturing facilities are convenient to important distribution points, making it able to maintain a low-cost provider position, especially on heavy but low-price-point products. And, finally, Highline has proven their inorganic growth capability, having integrated 12 companies.
What should other prospective buyers know about this subsector?
Kidd: Virtually all sub-segments of the automotive aftermarket represent attractive investment opportunities—both for underwriting stable organic growth as well as consolidation opportunities due to the highly fragmented nature of the industry. From consumable maintenance items such as fluids to replacement parts as well as automotive service providers, there are pockets of the aftermarket with tremendous long-term opportunity. Whether driven by the everyday driver delaying a new car purchase or the enthusiast who has extra disposable income to put into their investment vehicle, demand is strong now and across economic cycles.
Conner: A company's distribution network is an important consideration. How much more volume can the company move without having to invest more in infrastructure? Each of the industry sub-segments is fragmented, and the opportunity to build scale is significant. You could acquire a product line and push it through an existing national distribution network. Or, you could create density in a specific market or add new markets. There are many ways to scale in this segment through M&A.
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Published February 2021