O'Reilly wins fight for CSK

O’Reilly Automotive Inc. won’t just reach its $4 billion sales goal by 2010. It’ll likely drive right by it this year.

The Springfield-based retailer (Nasdaq: ORLY) April 1 announced it has signed a cash-and-stock agreement to acquire Phoenix-based CSK Auto Corp. (NYSE: CAO) worth about $1 billion, including $500 million in debt. The transaction is expected to close this summer, according to O’Reilly CEO Greg Henslee.

The deal – the biggest acquisition in O’Reilly’s 51-year history in terms of dollars – brings O’Reilly within 50 stores of Advance Auto Parts Inc., the nation’s second-largest auto parts retailer. CSK is the fourth-largest chain, with about 1,350 stores. O’Reilly operates around 1,830 stores.

The strategic move also nearly doubles O’Reilly’s revenues. O’Reilly reported revenues of $2.52 billion in 2007 its earnings report; CSK and O’Reilly combined in 2007 had pro forma revenues of about $4.4 billion.

That figure obliterates O’Reilly’s companywide “4 N 10” goal set three years ago to record $4 billion in sales in 2010, according to spokesman Mark Merz.

“We’re very growth-oriented, so once we achieve one goal, we certainly set another goal out there for us,” Merz said of what O’Reilly will do now, though no specific numbers are on the table.

The $1 billion deal

The CSK announcement comes two months after O’Reilly publicized its desire to buy the floundering auto parts retailer and made a $352 million offer to its shareholders. Less than a week later, O’Reilly entered a standstill agreement with CSK, joining about 20 other interested suitors for CSK, whose stock dropped under $4 a share in January.

Talks progressed, according to Merz, and O’Reilly’s offer rose to the top. CSK Investor Relations Manager Brenda Bonn referred questions to a public relations firm representing the company, and calls were not returned by press time.

O’Reilly will purchase CSK’s roughly 44 million outstanding shares for about $528 million and assume about half-a-billion dollars in debt. CSK shareholders will receive $11 of O’Reilly common stock, subject to a collar, plus $1 in cash for each CSK share.

Based on CSK’s closing share price of $9.31 on March 31, O’Reilly expects to issue about 16 million shares to CSK stockholders, according to a company news release.

O’Reilly has obtained a $1.2 billion asset-based revolving credit facility with Bank of America and Lehman Brothers Inc. to refinance debt, fund the cash portion of the deal and cover other transaction expenses, according to the release.

Covering the nation

Henslee said in an April 1 investor conference call that O’Reilly is particularly attracted to CSK’s geographic coverage – primarily the Western United States – and its dual-market strategy.

“One of the main aspects is the fact that our two companies maintain highly complementary business models in two distinctive regions of the country,” he said during the call. “We will be well positioned to expand our geographical reach.”

CSK’s brands – Murray’s, Checker, Schuck’s and Kragen – operate in 22 states, including 12 where O’Reilly doesn’t have a presence. O’Reilly’s stores are in 26 Midwestern and southeastern states.

That leaves only the New England states without an O’Reilly flag, Merz said. While no specific plans to expand there have been laid out, it’s a logical move, he said, depending on the company’s distribution network. O’Reilly has 14 distribution centers, with a 15th under construction in Lubbock, Texas, and slated for a third-quarter opening this year. Also, a 300,000-square-foot distribution is in the works in Greensboro, N.C., according to the Greensboro Economic Development Alliance.

With near-nationwide coverage, O’Reilly will be able to tap into national advertising and begin establishing the brand at a new level, Merz said.

CSK operates with a dual-market strategy much like O’Reilly, meaning it serves two segments: the do-it-yourself consumer and the professional installer. The difference, however, is in the balance. O’Reilly strives for a 50/50 breakdown, Merz said, while CSK weighs heavily on the consumer side – about 85 percent.

“We see significant potential to take professional installer business and really increase revenues in that direction,” he said.

The size of the acquisition spells unprecedented growth for O’Reilly, but officials are keeping a level head. Henslee says the company may scale back its organic growth while it focuses on bringing CSK under the O’Reilly name.

Original guidance has O’Reilly opening 205 stores this year, up from 190 new stores in 2007. Henslee estimates that could now be between 140 and 150 stores.