@gragou2, I'm with you on this being somewhat of an unremarkable...

@gragou2,

I'm with you on this being somewhat of an unremarkable acquisition.

To the three reservations about which you are pondering, I'll add a few more:

1. It takes the company into the recreational/leisure end of the auto market, which makes GUD's earnings increasingly a function of consumer sentiment/discretionary spend conditions. Which I feel is less defensive and predictable a business compared to the company's legacy "maintenance"-type product offering.

2. Related to that, it means that GUD has acquired a business which competes - partially not totally - with the world-class ARB. Frankly, if I was to back a race in which ARB is running, my money never goes on the other horses.

3. Unlike GUD, APG has a big manufacturing footprint. Sure, there's the manufacturing margin that gets to be had, but the flipside is that it increases both the complexity and the capital-intensity of the company.

4. My sense of the acquired business is that - with its recreational/leisure product range - it is significantly more SKU-intensive (4,000 SKU's!) than GUD's legacy business, which was relatively streamlined in terms of the number of SKU's.

5. This means that the company has significantly fattened its supply chain. So this has added a layer of complexity to the business, not only in terms of having to get merchandising right in terms of front-end SKU's, but also in terms of increased procurement demands on the back end of the business.

6. And then I wonder about the state of the business being acquired in terms of the state of systems, business infrastructure, and being appropriately resourced - when operating margins expand as fast as they have for APG (from 15.5% in 2019 to 25.6% this year) then, sure, some of it is due to natural operating leverage - Revenue having gone from $200m to $320m over that period.
But part of me is suspicious that there will have been an element of cutting cost corners to window dress the business up for sale. This is a PE vendor, after all.


So I do worry that this acquisition - which, remember, is highly material in terms of its size relative to GUD's market value - might have diminished the defensiveness and overall quality of the overall GUD business.

This deal certainly has a few hallmarks of "We have to do something to "de-ICE" the business model".

So, while I don't think its the best deal GUD management have done, I can sort of understand while they've done it.

But all that said, they didn't exactly pay over the odds for this acquisition (depending, of course, on the extent to which demand for APG's products have been artificially high over the past 18 months due to the impact of Covid-induced domestic spending).

At an acquisition multiple of 9x EV/EBITA (pre synergies) there is a lot of wiggle room for things to deteriorate before it would become a value-destructive purchase.



So, notwithstanding the brickbats listed above which makes me a bit "Meh"on the acquisition, I still intend to take my my full entitlement in the equity raising for the simple reason that the stock is objectively cheap (my rudimentary modelling incorporating this acquisition, as well as the recent Vision-X acquisition, has pro forma EPS between $0.95 and $1.00; so a P/E of less than 12x at the current share price - and less than 11x at the $10.40 raise price.)

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