Investment Column : Motor parts deal makes good sense

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The Independent Online
The acquisition of Motor World by Finelist, a 75-for-73 share swap, seems to make such abundant sense that yesterday's 7p drop in the purchaser's share price to 285p seems a harsh assessment. It is, however, a large buy by Finelist's standards so some nervousness is perhaps understandable.

In essence, the deal is a piece of vertical integration, putting Motor World's 328 retail motor-parts outlets together with Finelist's 208 existing distribution sites. Combining the two should provide purchasing efficiencies, better relationships with suppliers, a wider customer base, cost savings and a better use of the group's infrastructure. It is expected to be earnings enhancing in the first year.

The deal makes sense on a purely arithmetical basis, with immediate savings worth maybe pounds 500,000 together with Motor World's profits inflating forecasts for Finelist for the year to next June from about pounds 9.7m to pounds 14m. Earnings per share in this first year should be slightly enhanced from 19.6p to 19.9p.

Next year the benefits really start to flow with existing forecasts of about pounds 10.5m being bumped up yesterday to maybe pounds 17.5m and eps of 21.3p expanding to 23.5p. The important point, however, is that these figures assume very little benefit from what, given Finelist's recent record, will be a concerted assault on margins at Motor World.

With an underlying return on sales of perhaps only between 5 and 6 per cent there is plainly plenty to go for before Motor World's margins approach Finelist's basic return of nearer 10 or 11 per cent. Finelist has a good record of integrating and improving acquisitions.

The combined group will become a substantial player in the hugely fragmented motor-parts market, estimated to be worth pounds 4bn a year. Most retailers are single site operations, with little information technology back-up and clearly a sizeable group with efficient systems is in a good position to progressively take market share.

At a premium of 36 per cent to Motor World's share price before the recommended deal was announced, that company's shareholders can feel happy that they are being given a reasonable exit from a relatively uninspiring investment over the past few years.

For Finelist shareholders, on a prospective p/e of 13 this year, with good growth to come, the shares look good value.

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