Keystone Adds Value To Automotive Aftermarket

Keystone Automotive is able to achieve relatively strong operating margins by providing value-added marketing and technical support services to its highly fragmented customer base. The company, a super-regional distributor to the automotive aftermarket, is focused on the higher-growth and higher-margin specialty equipment segment. "They deal in a lot of specialized esoteric products that some people want, but retailers wouldn't really want to stock up on," explained Lisa Matalon, a v.p. and senior analyst for Moody's Investors Service.

Keystone has two hub warehouses and provides an inventory service for a large number of low-volume specialty items. The company also has sophisticated e-commerce services available to customers to support the sale of its products. "They maintain their inventory on a whole-operation basis instead of a store-by-store basis by maintaining a hub-and-spoke, just-in-time distribution system," Matalon noted. Keystone's vendors are also a highly fragmented group of small-to-midsize businesses.

Bain Capital Partners and Keystone management are acquiring the company. Moody's has assigned a B1 rating to the $165 million bank deal that backs the leveraged buyout. The total purchase price for the buyout is $440 million, giving the transaction an 8.4 times multiple of the company's EBITDA. The financing package includes the credit facility, $175 million in senior subordinated unsecured notes, and $175 million in equity. Keystone will receive $168 million in new equity with $140 million coming from Bain, $20 million from Advent International Corp.--one of the company's existing equity holders that has chosen to buy back into the company--and $8 million from other investors. The remaining balance of the equity will be provided by management.

The company does have an inventory risk, but Matalon noted that Keystone has sophisticated information systems and sufficient insurance to cover their inventory. In terms of credit metrics, the company has high pro forma leverage at 5.5 times and pro forma EBITA coverage of interest is about 1.8 times. Keystone will also be approximately 62% capitalized with debt after the transaction is completed. Calls to Bryant Bynum, Keystone's cfo, were not returned by press time.