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Limited organic growth prospects and cheap debt are fuelling a pan-European consolidation race among leading European auto parts suppliers Dakar Finance S.A. (Autodistribution, B2 stable), Alliance Automotive Holding Limited (AAG, B1 stable) and LKQ Corporation (LKQ, Ba1 negative) as they turn to mergers and acquisitions to drive growth and boost market share, says Moody's Investors Service in a new report.
"Autodistribution, AAG and LKQ are leading the consolidation charge in Europe having already gobbled up a number of small and mid-sized players in different countries, and we expect them to continue to use historically cheap debt to finance more acquisitions in 2017-18," says Pieter Rommens, a Moody's Vice President -- Senior Analyst and author of the report.
AAG has more than doubled its revenue in the last five years. Only approximately 20% of the revenue growth was organic, with the remaining 80% stemmed from acquisitions. Moody's expects that AAG will maintain its aggressive debt-funded acquisition strategy to continue international expansion and will show limited deleveraging in 2017.
Conversely, Autodistribution is focused on integrating its recently acquired Doyen Auto Group and increasing efficiency gains and cost savings. It has stronger deleveraging potential than AAG as a result of continued margin improvements and early redemption of its Pay-If-You-Can facility. For both companies, free cash flow generation will be limited by continued investment to fund acquisitive growth, service debt and increase operational efficiencies.
In 2017, organic revenue growth in the sector will be limited because despite the rising average age of cars in circulation and increasing technological complexity of parts, the increased quality and durability of parts and stagnant or declining average mileage, result in less wear and need for repair.
In addition, car manufacturers and specialized web dealers are starting to pose a competitive threat to the independent automotive aftermarket. In July 2016, Peugeot S.A. (Ba2 stable) announced plans to launch Distrigo, its own multi-branded automotive spare parts distribution network. This will further accelerate the race to consolidate as players seek to protect their market shares.
