Butler

Introduction

Butler Capital Partners (Butler) is an investment fund founded in 1990. Butler closed its first private equity fund, European Strategic Fund, in 1991. This first fund was mainly focusing on small family owned enterprises and on divisions of larger companies. Mainly of his first success he closed in 1998 his second fund, Private Equity II, and Butler became one of the largest independent funds in France. With his second fund he would focus on investments in France on a larger scale. On April 29, 1999, a new investment opportunity arose for Butler: Autodistribution (AD). AD is an entrepreneurial firm and has become the largest independent automotive parts wholesaler in France by the end of the 1990s.

This report starts with an analysis of the opportunities and risks for the AD deal and determines whether Butler should make a proposal or not. Hereafter, a valuation of AD is given. In the next paragraph the chances for European expansion are evaluated. Then the structure of the compensation package to Chavanne is determined and at the end a short conclusion of this case is given.

1. Should Walter Butler Submit a Proposal for AD? What is the nature of the opportunity?

Autodistribution in the auto market

First we focus on the future outlook for AD in the auto market. In 1962 AD started as an automotive parts purchasing association controlled by independently owned affiliates. By the 1980s, AD began to acquire wholesales and the purchasing power of AD grew. In 1976 the network of AD expanded abroad, through an international subsidiary of AD (AD International). At the end of 1998 AD was the largest independent wholesaler of automotive parts in France and even in Europe.

The outlook in the auto market is favorable with a growth of 2 to 3% in the foreseeable future due to the growing number of cars in circulation, an aging car fleet, increased technical complexity of car parts, new legislation requiring more frequent vehicle inspections and deregulations to meet European standards.

To maintain its good position in the market and to generate sustainable growth, AD made four strategy elements to forward the company. First, it will pursue an aggressive acquisition program to build up the organization. For the approximately first three years it will focus on expanding in France and thereafter it will make acquisitions outside France (in Europe). Second, it will increase efficiency within the organization's existing subsidiaries. Third, it will improve central organization through the elimination of back-office expenses and better coordination of logistic. Finally, it will increase the purchasing power of the central buying unit (CBU) by increasing demand garnered through acquisitions made before, increase the percentage of purchases affiliates and subsidiaries made through CBU and/or by increasing the supplier base. With these four elements of AD's strategy it expects that AD will make/keep a powerful presence in not only France, but also in whole Europe.

Looking at the company information at exhibit 19a, AD has performed quite well in 1998 compared to UK companies and most of the US companies. For example the net income multiple for AD, two UK comparable companies (Partco and Fine List) and the average are 21.63, 11.6, 7.6 and 18.44 respectively. The revenues of AD in 1998 are 884.40, while the revenues of the two UK companies are 696.96 and 620.90 (in millions of USD). However, the range of revenues between the US companies is really big. Furthermore, one can see from the figures that AD has relatively high sales, but small margins on those sales (see gross margin).

Overall, given the information above, we can note that the position for AD in the auto market is strong.

Opportunities, risks and some constraints

As concluded above, AD is currently an attractive company in the auto market. But, to solve the question whether Butler should buyout this company, let us first analyze the opportunities and risks for the buyout.

Let us first focus on the interesting opportunities, which exist in the deal for AD. Butler found some important development opportunities for AD: (1) an increase in penetration rate of AD's CBU among the affiliates by setting up an efficient IT system for purchasing, (2) external growth opportunities in France by integration of affiliates or acquisitions of independent wholesalers, (3) expansion opportunities in Europe provided by the fragmentation of the industry, (4) low competition on acquisitions because of the lack of players able to afford a dynamic build-up strategy, (5) strong growth potential of industrial supplies segment and (6) potential of development of fleet maintenance and agreements with insurance companies. These opportunities will result in an increase in gross margins through acquisition of independent wholesalers and integration of affiliated wholesalers. Furthermore, a reduction of operation costs can be the result, because of the IT system. With the existence of an efficient IT system, the margins can be improved or the prices can be cut and these effects are even stronger with consolidation / expanding in the European market. Besides these opportunities there is an opportunity for an e-business market. Butler stated this as 'one edge over the competitors'. Thus by expanding the business (through e-business, acquisitions, integration) and making use of the new technology systems, AD could realize significant margin improvement. These high margin improvements are expected to increase from 32.3% in 1999 to 36.5% in 2005. In addition the increase in sales from acquisitions is expected to almost double in the next 7 years according to the data . When these data are reliable, the opportunities create significant value. The valuation in the next paragraph, which takes these opportunities into account, shows us that the value of the company (including the above described opportunities) is higher than the price of the deal. Furthermore, we will elaborate on the European expansion opportunities in paragraph 3.

However, at the same time some risks are also involved in this deal. First, the lack of international experience can create risks. Except Chavanne, no one at AD had had any real international experience. Besides this, an even more important risk is the execution risk. This execution risk was caused by the lack of structure. With changing the culture of the company this risk could be reduced, but with the relatively long established management this could be a problem. Although these risks will not completely disappear, with some changes in the company these