SEMA eNews Vol. 10, No. 22, May 31, 2007

FOUR REASONS FOR INCREASED AUTOMOTIVE AFTERMARKET CONSOLIDATION

Record capital inflows and low interest rates have lead to a blistering merger and acquisition (M&A) market for financial and strategic buyers-the former looking for acquisitions which will yield synergistic benefits while the latter add value to the organization with the stated goal of reselling the business at some point in the future for a profit. M&A in the automotive aftermarket has behaved in the same way as broader M&A market transactions continued at a frenzied pace during the first quarter of 2007, according to a recent Aftermarket Analyst article.

The specialty-equipment industry-consisting of performance parts and accessories-represents a subset of the overall automotive aftermarket.

Buyers are very eager to invest their capital, but what makes the auto aftermarket so attractive to a potential buyer? According to the Aftermarket Analyst editors, the four main growth drivers in the auto aftermarket are:

1. Increases in the size of the country's automotive fleet
2. Increases in the age of the country's automotive fleet
3. Increases in the number of miles driven annually per vehicle
4. The higher cost and increased technology of new cars

The number of vehicles on the road in the United States has increased significantly in recent years, so there are now more vehicles than ever in need of aftermarket products. Between 1996 and 2005, U.S. motor-vehicle registrations increased more than 21.3% to 232 million total units. The aging of vehicles currently in use has also been a significant factor contributing to the growth in demand for aftermarket products. For example, as the average age of autos in use increases, owners are more likely to purchase aftermarket products to enhance or repair their aging vehicles.

The aftermarket is growing because the vehicle population is getting older, with approximately 39% of cars more than 10 years old. The average vehicle age has grown significantly over the last few years, with the average age for passenger cars reaching 10 years. Between 1996 and 2005, the average age of all passenger cars on the road increased from 8.6 to 10.0 years. The average age of light trucks increased from 8.4 to 8.7 years during the same period. This trend is expected to continue for the foreseeable future, further accelerating growth in demand for aftermarket parts.

An increase in total miles traveled has an obvious positive influence on the aftermarket in terms of consumable products, such as oil and tires. According to the Auto Aftermarket Industry Association (AAIA), total miles traveled has increased from 2.4 trillion miles in 1996 to 2.95 trillion in 2005. This reflects a 25% increase. More importantly, miles driven per vehicle is trending up, so each of these vehicles will need more service repair parts.

Relative to average family-income levels, new vehicles have become more expensive, with the average unit costing about $22,000. The result is that consumers are increasingly seeking ways to protect or enhance their investment. At the same time, more middle- and lower-income families opt for well-equipped used cars, rather than stripped-down, smaller new cars. Consequently, demand for aftermarket products has increased dramatically. New-vehicle technology has increased the cost of replacement parts and vehicle complexity. As a result, fewer people are desirous or even capable of repairing their own vehicles-opting instead to have then serviced by professional mechanics.

Excess capital and low interest rates are the "fuel" that is powering the current M&A market. While their source of capital differs, strategic and financial buyers appear to be well suited for another strong year of merging or acquiring businesses. This is true not only for the broader U.S. M&A market, but also for the auto aftermarket, which remains poised for growth and continues to be an attractive industry for investment.

Source: "Market Update: M&A in the Auto Aftermarket" (May 15, 2007). The Aftermarket Analyst newsletter by The Capstone Financial Group. www.capfg.rsvp1.com.