Mergers and acquisitions (M&A) is an umbrella term for financial transactions in which one company purchases another outright or two companies merge to create a new one.
M&A activity has led to the formation of the largest car wash chains in the country, including Mister Car Wash with 465 locations (NYSE: MCW), Take Five with 389 locations (Driven Brands), and others.
Reportedly, Leonard Green paid $400 to $500 million for Mister Car Wash in 2014. Another big one as in 2017 when Roark Capital Group acquired International Car Wash Group (ICWG), which has more than 900 locations in 14 countries. In 2020, ICWG was acquired by Driven Brands (NASDAQ: DRVN).
According to an article by George Odden, Ardent Advisory Group, M&A activity has flooded the car wash industry over the last five years. Recent activity includes:
• Oaktree Capital acquired Magnolia Wash Holdings (118 sites). The deal’s value was undisclosed.
• Couche-Tard (Circle K) acquired True Blue Car Wash (65 sites) for $395 million.
• Dover (NYSE: DOV) acquired Transchem Group, a leading provider of car wash chemicals and water reclaim systems for $48 million.
These are huge deals, most of which are fueled by private equity firms. A private equity firm is a type of financial management company that raises pools of funds from private investors. These funds are often used to acquire a controlling interest in a business, restructure/improve it, and then resell it later at a profit. Funds can also be used to fuel growth.
For example, Spark Car Wash will employ capital to fund a pipeline and expand its position in the northeast. The company has three sites in operation, four under construction, and visibility on 32 locations.
M&A activity has also allowed firms to achieve strategic objectives such as vertical integration. For example, with the Transchem deal, OPW’s Vehicle Wash Solutions (part of Dover’s Clean Energy & Fueling segment) gains 45 years of industry experience and a wide range of high-performance cleaning and chemical solutions and related products. OPW was formed by the combination of three brands: PDQ (in-bay), Belanger (conveyor), and Innovative Control Systems (technology).
There is no denying that private equity-backed acquisitions, greenfield development, and growth capital have contributed to industry expansion. For example, analysts claim the number of new conveyors has increased from an average of 500 a year to as much as 1,000 a year, and there may be unmet demand for more than 10,000 locations. Of course, the big attraction is express exterior, with its huge sales volumes, low labor model, and recurring revenue from subscriptions.
Producing 150,000 to 200,000 washes annually is no longer anticipated; it is expected, as are start-up expenses of $5 million or more. So, a $200 million deal could involve 40 or more locations. However, like any other market, what goes up eventually comes down.
According to the Car Wash Advisory website, the number of large transactions dropped from 95 in 2022 to 38 in 2023, whereas the number of sites involved dropped from 517 to 216.
Analysts at Raymond James attribute the cool-off to higher interest rates, less available financing, gaps in valuation expectations, more competition, market performance, and consumer confidence. This was echoed by Jeff Pavone, Amplify Car Wash Advisors, who finds that M&A deals in the market decreased by as much as 75 to 80 percent from 2022 levels.
Also cooling off are valuations. They are reportedly as much as 20 percent lower. The principal reason is the interest rate — it was once 5 percent and is now 10 percent.
According to Odden, “because capital is more expensive, buyers cannot pay as much as they could before.” The increasing cost of doing business, including real estate, construction, equipment, and operating expenses, is added to this equation.
Nevertheless, M&A activity and private equity-backed ventures will continue to be major drivers in the car wash industry. This should be expected. Despite some headwinds, the car wash industry’s business fundamentals are strong and are anticipated to remain strong for some time. Consequently, the car wash industry should remain a good place to put capital to work.
Pundits opine that acquisitions will again take center stage in the future, as opposed to new construction or the sale-lease-back market. Acquisitions are more expedient, and there are still many existing permitted sites to consider.
According to a research study commissioned by the International Carwash Association, there were more than 16,250 self-service car wash locations in the U.S in 2020. About 50 percent of these facilities have at least one in-bay automatic on-site.
Another 20,000 or so car washes are located within the convenience store and gas station industry. Many of these sites have building dimensions suitable for conversion to express wash.
Last year, Auto Laundry News’ editor-in-chief Tim Denman mentioned in his editor’s note that it has become harder and harder to find ongoing mom-and-pop success stories. Forcing him to write primarily about multi-site operators gobbling up locations by the dozen in the Profile in Success monthly feature. I believe the single reason for this is simply interest rates.
In 2019, prime was as low as 4.75 percent. Today, it’s 8.5 percent. Add a fee, and you have a loan interest rate of over 10.0 percent. Unfortunately, mom-and-pop do not have access to the same capital as a firm doing a $200 million deal.
Interest rates are bound to normalize when there is more economic freedom. Once this occurs, I believe we will see mom and pop put shovels in the ground and retro-fit and upgrade sites.
