Advance Auto Parts, Inc. (NYSE:AAP) announced on Wednesday it plans to acquire General Partners International, a privately held parts maker, for $2.04 billion in cash. Advance Auto Parts will have to pay a termination fee of $185 million, under certain circumstances, if the deal falls through, says a report from Reuters. The deal will be financed through cash on hand and new bonds and loans.

Advance Auto Parts

Multiple benefits for Advance Auto Parts

United States economy is slowly getting back on track, and that has inspired many Americans to purchase new cars, affecting the replacement market segment, which was already reeling  due to a less active winter last year. Advance Auto Parts, Inc. (NYSE:AAP) has been depending on acquisition to balance its declining organic sales, and acquisition of General Parts will expand Advance and its customer reach.

The portfolio of General Parts, which has expertise in servicing commercial customers, will also boost Advance Auto’s portfolio.

Through this deal, Advance is looking forward to saving costs of around $160 million annually within three years. The acquisition is also expected to add 20 percent to the company’s cash earnings per share for the 2014 fiscal year.

According to Advance Auto Chief Executive Darren Jackson, 1,418 Carquest locations will increase the sales of the company in North America and will provide it an opportunity to dominate the commercial market.

At present, around 40 percent of 3,400 Carquest stores are run by General Parts. The auto parts company, established in 1961 by Temple Sloan Jr., also runs Worldpac, which supplies replacement parts for imported car and truck brands.

O. Temple Sloan III will remain as the president of General Parts after the deal is concluded.

Combined entity to be the biggest player in the segment

Through this acquisition, Advance Auto will become most dominant player in the car parts segment with annual revenue of more than $9.2 billion.

Once the deal is done, and Advance Auto Parts, Inc. (NYSE:AAP) and General Parts become one company, the new company will be valued around $9.2 billion more than AutoZone, Inc. (NYSE:AZO), which at present is the most dominant player. For the year ended August 31, AutoZone posted adjusted net sales of around $9 billion.

For the third quarter, Advance Auto Parts posted operating income of $170.7 million, which is an increase of 13.5 percent from the corresponding quarter of the previous year. Revenue surged 4.3 percent, to $1.52 billion.