BREAKINGVIEWS-A $17 bln breakup tests Wall Street’s mantras

By Sebastian Pellejero

NEW YORK, Feb 18 (Reuters Breakingviews) - Wall Street’s perennial advice has found another taker. On Tuesday, $17 billion supplier Genuine Parts GPC.N said it would split its automotive and industrial arms into separate listings. The oft-repeated theory goes that ushering more-focused businesses into the light can win higher valuations. In this case, it would also leave two units to fend for themselves in rapidly evolving markets, surrounded by large and efficient competitors. Clarity could cut both ways.

Investors do seem to pay up for specialists. Pure-play car-part peers like AutoZone and O'Reilly Automotive trade at a broad range that runs as high as 20 times next year's anticipated EBITDA, according to LSEG data. Meanwhile, industrial distributor W.W. Grainger sits near 17 times, and Fastenal closer to 26. Genuine Parts, with a foot in both markets, wins a relatively measly 11-times multiple.

Its auto business is expected to generate about $1.4 billion of EBITDA next year, compared to $1.2 billion for the industrial segment, per Visible Alpha. Even at the low end of peer multiples, that implies the enterprise should be worth about $32 billion, for a market value over 50% above today’s after subtracting debt.

On paper, that's attractive. That’s probably why so many CEOs follow this path, with nearly $2 trillion of spin-offs and separations unveiled worldwide in the decade to 2025. Yet shares fell 15% after the announcement, which coincided with disappointing financial results.

There are good reasons for caution. The automotive business is a mélange of owned and franchised operations, lacking the vertical integration of AutoZone and O’Reilly, which post EBITDA margins over three times as high as Genuine Parts’. The franchise model does free capital for acquisitions and upgrades, at the potential cost of speed and reliability that come with tighter control. Advance Auto Parts exemplifies the pitfalls: its shares have fallen more than 70% amid supply-chain snafus.

On the industrial side, the case is clearer. The business commands 6% of a $150 billion global parts market, according to company documents, nearly double peer Applied Industrial Technologies, at a similar margin. Size alone doesn’t guarantee value, though – Applied trades at a discount to the likes of Fastenal, though still at a better multiple than Genuine Parts.

A split may satisfy pushy investor Elliott Management, which secured an agreement to refresh the board last year. It will also make performance harder to obscure, hopefully focusing managerial attention. Yet break-ups are best when they reveal a clearly superior business, giving investors access to diamonds in the rough. More often, they simply make the work ahead impossible to ignore.

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CONTEXT NEWS

Automotive and industrial parts distributor Genuine Parts said on February 17 that it will separate into two independent companies. The split, which does not require shareholder approval, is expected to be completed in the first quarter of 2027.

The announcement follows a settlement last year with activist investor Elliott Management, which agreed to add two new directors to the board.