Despite a large war chest to do deals, potentially strained large and small competitors and Driven Brands’ mid-pandemic acquisition of Fix Auto USA, Boyd Group Services told analysts Wednesday it would continue to hold off on mergers and acqusitions for now.
With the COVID-19 coronavirus looming as a threat, the Gerber collision parent company on March 17 increased its revolving line of credit to $550 million USD with an accordion option to expand to $825 million USD, and it took out a seven-year, 3.455 percent $125 million USD term loan. It then drew down all available credit except a $40 million USD swing line and the $275 million USD accordion.
These moves left the major MSO with $576 million CAD on hand as of the end of the first quarter, plus the $231.5 million gross from the stock offering Boyd said Thursday had been completed. CEO Tim O’Day on Wednesday said the company altogether had more than $1 billion in cash and credit at its fingertips with only a conservative 1.9 times earnings before interest, taxes, depreciation and amortization worth of existing debt.
However, O’Day on March 18 announced “a near-term pause on closing and funding acquisitions until we have greater clarity” on the COVID-19 situation.
Boyd in 2015 announced a goal of doubling the company’s size by 2025, and the subsequent buying spree in the U.S. and Canada allowed it to get 97 percent of the way there by the first quarter of 2020, according to O’Day. Upon examining the quarter’s results, the company feels it effectively crossed the finish line, he said.
“We are closing out this goal as accomplished at the end of Q1,” O’Day said.
Winnipeg, Manitoba-based Boyd’s collision, glass and claims interests span the U.S. and Canada, but nearly all of its employees and revenue are tied to the U.S., with Gerber a significant contributor to both.
Investors could expect Boyd Group Services’ plan for next-level growth and operational goals in the second half of the year, according to O’Day.
“We believe that there will be many opportunities that come from this crisis, both internal and external,” O’Day said.
Asked how investors could reconcile guidance that M&A had halted with Boyd sitting on more than $1 billion, O’Day agreed with the analyst’s suggestion investors consider the money as an “‘insurance policy.'”
The company was “well-prepared” to start buying shops, but “we don’t yet know when that will be,” O’Day said.
Chief Financial Officer Pat Pathipati said a decision to restart M&A would be a “judgment call” rather than a specific checklist of conditions. The exact date didn’t matter either, he said. “We are in a long game,” Pathipati said.
O’Day said the “biggest concern” in doing a deal probably wasn’t due dilligence. Rather, the company needed to know that its acquisition integration team could travel to a new shop, he said.
“We’re not there yet,” he said of travel.
Asked if Boyd was examining buying or merging with anything larger than a regional MSO, O’Day said, “We don’t have anything specific yet.” The company wanted to prepare to take advantage of opportunities, he said.
Pathipati said Boyd had a “tremendous opportunity” ahead and a “substantial” competitive advantage over other major rivals.
Moody’s on April 29 said Caliber’s debt stood at about 6.9 times its earnings before interest, taxes, depreciation and amortization for the 2019 fiscal year. According to the ratings agency, Caliber posted an EBIT/interest rating of “roughly 0.7 times” in the 2019 fiscal year, indicating it wasn’t making enough to cover its interest. However, the ratings agency felt “with nearly $300 million in cash presently, liquidity is sufficient to handle any forseeable cash flow deficits.”
Service King carried debt representing about eight times EBITDA for the 2019 fiscal year and an EBIT/interest ratio “well below 1 time (including 50% credit for cost savings from front-office re-structuring initiatives executed in early 2020),” Moody’s wrote March 24. On March 30, Moody’s said Service King also had adequate liquidity at $200 million, though $80 million of it came from a paint contract renewal prebate and was “unavailable for debt repayment.”
The Moody’s ratings don’t discuss the potential that Caliber and Service King’s private equity owners inject more money into the companies.
Asked about greenfielding, which refers to building a property completely from scratch, O’Day said he felt some greenfielding (building a property from scratch) would be in Boyd’s 3-5 year plan, but brownfielding (using an existing site) was more likely and could even receive Boyd’s focus near-term. This might even entail reopening former body shops under Boyd brands, he said.
O’Day said he felt some repairers would fold, depending on the intensity and length of the economic impact of the COVID-19 response. This might yield “attractive and accretive” properties, he said.
Boyd didn’t have perspective on increases or decreases in multiples Boyd might pay for locations, according to O’Day.
However, Executive Chairman and former CEO Brock Bulbuck said it seemed intuitive that the “more stress and distress some businesses face, the more eager they may be to look at strategic alternatives for their business.” Boyd would expect “more motivated sellers,” he said.
“Our team has undertaken proactive steps to adapt to the current environment, and to maintain our strong financial position,” O’Day said in a statement. “We have been able to adjust our business to manage through this challenging situation, while also preparing to ramp back up as the demand for collision repair services begins to rise and growth opportunities emerge. Boyd team members have demonstrated exceptional perseverance and entrepreneurial spirit to adapt our operational excellence strategy by developing and executing revised operating procedures that provide a safe and healthful work environment while maximizing the business opportunities that exist. We believe there will be many opportunities that come from this crisis, both internal and external and we are preparing to put ourselves in the best possible position to come out of this crisis as a stronger company. I am humbled by the sacrifices our team members have made and we look forward to being in a position to reinstate many of those who were laid off when the time is right. Our priorities remain taking care of the health and safety of our team members and customers while scaling our business appropriately during this pandemic, as well as preserving financial flexibility and preparing for the opportunities that lie ahead.”
It’s also worth noting that Boyd has both expanded its borrowing power and received more flexibility as a borrower.
The company is required to keep senior funded debt no more than 3.5x EBITDA (4x is OK for a year after a material purchase), with lease payments deducted from EBITDA. It also must keep an interest coverage ratio of 2.75.
However, Boyd recently secured the wiggle room to ignore those rules between July 1 and Dec. 30. It also is permitted to use a 4x debt-EBITDA ratio for a while and have a 3.75x one for Dec. 31 to June 29, 2021. Finally, it can now compare debt against the second- and third-quarter EBITDA of 2019 instead of its 2020 EBITDA in such calculations.
“While the Company has not breached any covenants to date, nor is it forecasting any breach for the second quarter based on current sales levels, this amendment is intended to prevent the effects of the COVID-19 pandemic from distorting the covenant calculations and distracting the Company or its lenders from the prudent management of the business over the quarters ahead,” Boyd wrote to investors Wednesday.
Boyd told investors the July 1-Dec. 30 suspension came with a requirement to keep $150 million USD worth of liquidity between July 1 to Dec. 30, “which, given the Company’s cash position and undrawn facilities, is not expected to be burdensome.”
Boyd Group, May 13, 2020
Boyd Group, May 13, 2020
Boyd Group, May 13, 2020
Boyd Group Services CEO Tim O’Day. (Provided by Boyd Group)
A Gerber location in the Grand Rapids, Mich., area is shown. (John Huetter/Repairer Driven News)