Past Issue

Consolidation - Key Leverage Points

By Robert Roman

12/01/15

Consolidation is a tool to achieve and sustain power in the marketplace and is encouraged by changes in the external environment.

One form is a large firm that acquires a smaller one to gain access to key company assets. For example, in June 2014, Ryko Solutions Inc., the largest provider of managed systems, agreed to acquire National Carwash Solutions L.P. (NCS), the largest independent service organization.

Another form is a large firm that acquires other companies to expand its network of stores. In December 2012, Mike Mountz, who founded Cloister Wash & Lube, sold his four locations in Pennsylvania to Mister Car Wash, a Tucson, AZ-based chain that’s the largest in the nation.

Mister Car Wash was founded in 1969 in Houston, TX. Since 2007, it was owned by ONCAP II, which is owned by Onex, a private equity firm. Mister Car Wash was on an acquisition spree in 2012 and, including the Cloister deal, added 32 locations via 10 acquisitions.

In August 2014, ONCAP II completed the sale of Car Wash Partners Inc. (Mister Car Wash) to Leonard Green & Partners (LPG), a private equity firm. Including prior distributions, ONCAP II received net proceeds of $423 million compared to an investment of $52 million. This represents a gross multiple of capital invested of about 8.1 times and gross IRR of 36 percent. Onex’s net proceed from sales was $153 million.

Many factors have to align to drive consolidation activities. Perhaps most important is opportunity. The U.S. car wash industry is nearly a $20 billion business. Most signals point to an industry that is mature, recovered from downturn, and growing again. Moreover, according to the Auto Laundry News Executive Forecast 2015 (December 2014, page 40), there is a lot of struggling car wash operators that have wanted to sell for some time.

Access to capital and financial resources is another key leverage point for consolidation strategies. For example, LPG reportedly acquired Mister Car Wash for $388 million. According to the Canadian Venture Capital and Private Equity Association, $15.1 million was debt and equity investment made by Penfund, a provider of junior capital to middle market companies.

In September 2014, Moody’s Investors Service assigned first-time ratings to Mister Car Wash Holdings Inc. with a B2 Corporate Family rating. Moody’s assigned a Ba3 rating to the company’s proposed $30 million secured revolving credit facility and a proposed $180 million secured term loan B. A stable outlook was also assigned.

These ratings were made in conjunction with Mister Car Wash’s affiliates acquisition by LPG with the initial capital structure to be comprised of roughly 50/50 debt and new cash common equity contributed by LGP.

Moody’s Corporate Family ratings are opinions of a company’s ability to honor its financial obligations. Obligations rated B are considered speculative and are subject to high credit risk. B2 modifier indicates a mid-range rating.

When assigning a rating to corporate, nonfinancial obligors, the Corporate Family rating is generally employed for speculative grade issuers. For these obligors, Corporate Family rating normally applies to all affiliates under management control of the entity to which it is assigned.

Consequently, knowing the risks is another key leverage point for consolidation. Consider Cherry, an online start-up business that offered mobile on-demand car wash services.

Cherry was started with a Series A investment of $4.5 million in 2011 led by Shasta Ventures, Founders Fund, and some angel investors.

According to the Venture Capital Dispatch, Zimride acquired Cherry’s mobile and web app, now defunct, in 2013. Zimride helps users join carpools via its peer-to-peer ridesharing service, Lyft, by ordering a ride from a non-professional driver using his or her own car. Zimride has no plans to offer car-wash-on-demand services.

Shasta Ventures’ Tod Francis, stated, “In order to be successful, a [car wash] company will need to nail labor and operational components of the business” — pricing correctly would also prove a critical challenge.

 

Bob Roman is president of RJR Enterprises – Consulting Services (www.carwashplan.com). You can reach Bob via e-mail at bob@carwashplan.com.



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