Rob Allan’s company Allomak has grown rapidly by buying up family-owned automotive businesses. But as JAMES THOMSON explains, the credit crunch has put the brakes on his acquisition drive.
By James Thomson
Rob Allan’s company Allomak has grown rapidly by buying up family-owned automotive businesses. But the credit crunch has put the brakes on his acquisition drive.
The Australian automotive sector is a scary place to be. In the last decade, plant closures, sharp input cost increases, job losses and poor profitability have become commonplace.
Yet Rob Allan, managing director of automotive conglomerate Allomak, says there are plenty of opportunities to be found – if you look in the right niches.
When Allomak listed in August 2006, it had revenue of $1.1 million. This year, sales are projected to pass $70 million.
The secret has been the successful execution of a string of acquisitions in the aftermarket end of the automotive sector, including businesses involved in automotive accessories, smash repair, LPG gas conversion, emissions testing and car parts.
But the business is facing a number of challenges. Execution and integration of acquisitions is a risky business at the best of times, and the credit crunch has made it difficult to get funding. And while the business remains on track to meet its profit forecasts, Allomak’s share price has dropped around 60% since the start of the year and is now back around the listing price of 40c.
A little bit of volatility won’t worry Allan too much though – he’s seen it all before as a management consultant at McKinsey and later as a venture capitalist in Silicon Valley. After the dot-com bubble burst, Allan returned to Australia and helped out with a management buy-out of the manufacturing arm of a small automotive retailer.
He started getting interested in the sector. “Getting into manufacturing and automotive wasn’t something I was anticipating. It was a little bit of a surprise to me too,” he says. “But this deal got me looking at margins in this business, and I was actually quite surprised to see there was good money to be made.”
What he found was that the automotive sector is divided into two parts; the original equipment sector, and the aftermarket sector.
The original equipment sector involves the parts and accessories supplied to car makers before the car leaves the factory floor. It’s the really tough end of the sector, where most companies operate on high volumes and low margins, and are forced by the big car makers to discount their prices a few times each year.
The aftermarket sector involves the supply of parts, accessories and services after a car leaves the showroom. The industry is worth around $8.1 billion and is extraordinarily fragmented, with lots of small, local, family businesses.
“There are dominant players but lots of little niches. There is a very large base of vehicle enthusiasts who support this market, plus the day-to-day drivers who are part of the market whether they like it or not,” Allan says.
He formed Allomak in April 2005 with the intention of acquiring key businesses in some of the juiciest niches of the aftermarket sector. His strategy was helped by intense generational change in the sector, with many of the owners of these family businesses looking to exit or wind back their involvement in the sector. Allomak has now acquired 16 businesses since its establishment – or one every six weeks or so.
There are three key planks to the Allomak strategy.
The first is acquisition excellence – buying the right business, for the right price, at the right time. A key part of this process is getting the integration right – or rather, minimising the amount of integration work that actually needs to be done by providing incentives for the previous owners to stay in the business. “We’ve built our model around not requiring too much integration,” Allan says.
The second plank is performance improvement within the individual businesses. While the previous owners are always experts at their trade, they are not always great managers. “There are some basic business disciplines that these businesses are just missing,” Allan admits.
And the third plank is to find synergies across the group, such as joint sales initiatives, group purchasing and shared functions such as sales support. Allan has been pleasantly surprised to see the business units start working together without any prompting from head office. “That’s the kind of integration that I really want to see.”
In many ways, Allomak’s is an age-old business strategy that has worked well in sectors such as childcare and personal services – take a cottage industry, consolidate it and introduce a more corporate strategy.
The US aftermarket sector has already undergone a dramatic period of consolidation, leading to the establishment of bigger, national players. Allan expects that trend will continue in Australia. “In most industries we are seeing a move towards more consolidation than less, and more corporatisation than less,” Allan says.
His challenge will be to keep Allomak’s momentum going. At the end of last year, the company set out to raise $15 million to fund further acquisitions and was thrilled to receive $55 million of committed funds. The company took a cautious approach and only took $17 million, only to find debt markets quickly dried up in early 2008 as the credit crunch hit. “We are going to need to contemplate how that’s going to impact our capital structure and how aggressive we can be,” Allan says.
He remains on the lookout for acquisitions and expects the size of transactions could increase from the current level of $1 million to $5 million. “I’ve always had a very robust pipeline, but it’s a matter of finding the right target.”
But he also stresses Allomak doesn’t need to rush into anything. “We’ve got some really good, solid earning companies that are going to generate earnings year-on-year. Those companies will underpin some other businesses that have real growth opportunities but need more work,” Allan says.
Rising fuel prices will also challenge the automotive sector, but the diversity within Allomak’s business portfolio will give it some insulation. While Allan concedes Allomak’s Barjo business, which makes aluminium bullbars, is feeling the pinch from falling large car sales, its businesses that do LP gas conversions is enjoying good growth. “Every 10c the petrol price rises at the pump, our inquiry level pretty much triples.”
Allan is also working to respond to investor requests for more communication and transparency from the company. While investors were satisfied with Allomak’s level of communications last year, the extreme volatility in equity markets has put pressure on all small caps to improve their investor relations. “We hadn’t changed what we were doing, but the market is a bit more skittish,” Allan says.
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