In addition, private closely-held companies have enjoyed a period of sustained prosperity since the 1980s. A generally favorable economy, combined with declining interest rates, has enabled hundreds of thousands of private companies to build substantial equity value. Many of these companies now face the challenge of balancing their requirements for capital against a need or desire for liquidity from one or more shareholders.
James H. Heafner started a small tire business on May 5, 1935, with one upright mold recapper and two manual gas pumps operating out of Lincolnton, North Carolina. Sixty-four years and three generations later, the Heafner Group has grown to become a leading national tire and automotive service and equipment distributor pursuing an aggressive program of expansions and acquisitions that should bring the company’s sales to a billion dollars this year.
History and Development
Heafner had enjoyed steady growth and a reputation for excellent service since its founding. The company opened its first branch location in Charlotte, North Carolina in 1954, and added nine locations in three states in the 1950s and 1960s. Heafner introduced its first private label brand, the Regul Tire brand, in 1972, and ten years later made its first major acquisition, Beech Tire Mart, bringing the company’s total number of distribution centers to 25 in 12 states. The company sold its 10 millionth Regul Tire in 1986.
By the 1990s, Heafner was operating 29 distribution centers in 18 states and was a leading regional distributor of tires, wheels, and service equipment. However, it wasn’t until 1997, when the Heafner and Gaither family determined that the company would have to grow through acquisition to achieve volume discounts and operating efficiencies necessary to survive in a highly competitive consolidating industry, that the real explosion began.
Winston Acquisition
In May 1997, Heafner entered the retail tire business with its purchase of Oliver & Winston, Inc. (Winston). Founded in 1962, Winston was the nation’s fifth largest tire retailer with 175 retail locations in California and Arizona. In order to finance this acquisition, Heafner arranged, in combination with other debt and equity financing commitments, a mezzanine capital investment from the 1818 Mezzanine Fund, a partnership managed by Brown Brothers Harriman & Co.
In addition to achieving the shareholders’ objectives of achieving volume discounts and operating efficiencies, the Winston acquisition provided Heafner a second high volume private label tire brand. Coincident with the closing of the purchase of Winston, the company also agreed to purchase certain of its own shares from several descendants of James H. Heafner who were not involved in the management of the company.
ITCO and CPW Acquisitions
Last year, the company took another important step in its growth toward the ultimate goal of becoming a leading national player in both the tires and related products distribution industry and the retail auto products and service industry.
On May 20, 1998, Heafner acquired ITCO Logistics Corporation and Competition Parts Warehouse (CPW). ITCO was founded in 1962 as Interstate Tire Company and was, at the time it was merged into Heafner, one of the largest wholesale distributors of tires, custom wheels, equipment, and tire dealer supplies in the Southeast. With 1997 sales of approximately $350 million, ITCO operated 30 full-service distribution centers in 8 states located from Baltimore to Miami.
CPW was started in 1971 as a performance automotive shop under the name Speed Merchants. By 1998, it had grown to a wholesale operation specializing in the after-market sales of tires, parts, wheels, and equipment, with six distribution centers in California and Arizona. CPW had fiscal 1997 sales in excess of $120 million and shipped more than 1.9 million passenger and light truck tires.
In order to finance the two acquisitions, the company issued $100 million of senior notes to the public. The two mergers increased Heafner’s retail locations by approximately 30% and its wholesale locations by close to 100%. In addition, operating efficiencies were dramatically enhanced, purchase power with tire manufacturers also increased, and earnings significantly improved.
California Tire Acquisition
More recently, in January 1999, Heafner purchased California Tire Company from owner Michael Largent, a well known figure in the wholesale tire industry. With 1998 sales of $34 million, California Tire distributes passenger, light truck, commercial truck, farm, and off-road tires and tubes to more than 1,500 dealers in California, Oregon, and Nevada from three distribution centers in Northern California.
Private Equity Financing
Over the last two years, the shareholders of Heafner have experienced significant increase in company value through growth in operations, but had little or no diversification in portfolio for estate planning purposes. Shortly after the acquisition of California Tire, the Heafner and Gaither family instructed management to explore means of value realization available to them.
The shareholders evaluated several strategic options including a sale of the company and financing in both public and private markets. Discussions were held with numerous private equity sources, with the primary considerations being stability, access to capital, and management philosophy. On May 24, 1999, the shareholders sold all shares of the company, except those owned by management and the 1818 Mezzanine Fund, to Fund IV of Charlesbank Capital Partners for over $40 million.
This new partnership with Charlesbank Capital provided Heafner Tire Group with a new source of growth capital to advance further toward its goal of becoming the leading national distributor of tires and related products and services. With the elimination of family constraints, management was able to increase emphasis on both strategic and operational issues, and apply a longer-term approach toward the company and industry.
Richard H. Witmer, Jr., partner,. and Lianne Lim, analyst, at Brown Brothers Harriman & Co. assist private and closely-held public companies on important financial and strategic issues through advising on mergers or sales, or providing private equity. They may be reached at 59 Wall Street, New York, NY 10005,
212.493.8403 or www.bbhco.com/
