Activist Ananym Capital urges LKQ to sell its European auto parts business
Company: LKQ Corp. (LKQ)
Business: LKQ distributes spare parts, components and systems used in the repair and maintenance of vehicles and special vehicle aftermarket products and accessories. The company operates in four segments: wholesale-North America, Europe, specialty and self-service. It offers bumper covers, automotive body panels and lights, as well as paint and paint-related consumables for the repair of vehicles; mechanical automotive parts and accessories; recovery products, including mechanical and crash parts including engines; transmissions; door components; sheet metal products such as trunk lids, fenders and hoods; and lights and bumper assemblies. The company also supplies scrap metal and other materials to metal recyclers; precious metals contained in some of our recycled parts, such as catalytic converters; and brake pads, discs and sensors, clutches, steering and suspension products, filters, oil and automotive fluids as well as electrical products. It serves retail customers as well as collision and mechanical repair shops and new and used car dealerships. LKQ was founded in 1998 and is headquartered in Antioch, Tennessee.
Stock Market Value: $7.66 billion ($30.15 per share)
Activist: Ananym Capital Management
Ownership: 0.39%
Average Cost: no
Activist Comment: Ananym Capital Management is a New York-based activist investment firm founded on September 3, 2024, and is led by Charlie Penner (former partner at JANA Partners and head of shareholder activism at Engine No. 1) and Alex Silver (former partner and investment committee member at P2 Capital Partners). Ananym looks for high-quality but undervalued companies, regardless of industry. They prefer to work amicably with portfolio companies, but are prepared to launch proxy struggles as a last resort. According to their latest 13F filing, they manage $260 million across 10 positions.
what’s going on
On October 21, Ananym Capital called on LKQ to divest its European operations and refocus on its North American business.
behind the scenes
LKQ is a leading distributor of aftermarket vehicle parts. North America’s core segment (40% of revenue and 55% of earnings before interest, taxes, depreciation and amortization) primarily supplies aftermarket crash parts such as mirrors and bumpers.
The European segment (47% of revenue/38% of EBITDA) primarily supplies mechanical and suspension products but also includes a wide range of other replacement and maintenance products. Although the European business is slightly larger in terms of revenue, it has significantly higher margins and a much larger market share compared to its North American business counterparts.
Finally, the specialty segment (13% of revenue/7% of EBITDA) provides aftermarket parts for the RV market. Originally only a US aftermarket parts business, the company began aggressively pursuing acquisitions in Europe starting in 2011, shifting from a focus on consolidation of recycled parts to establishing and integrating a footprint in Europe.
Moreover, these two businesses are not as similar as they say; In North America they mainly make aftermarket crash parts like mirrors and bumpers, and in Europe they mainly make mechanical suspension and stuff under the hood.
LKQ is no stranger to shareholder activism. In September 2019, when the stock was trading at $27 per share, ValueAct Capital signed with the company and placed one of its partners on the board. Through this campaign, ValueAct was able to usher in a new wave of operational discipline in which, instead of focusing on mergers and acquisitions in Europe, LKQ paused large acquisitions and shifted its focus to increasing the company’s free cash flow and executing buybacks at an attractive discount.
The results of this campaign are obvious; LKQ’s share price rose above $60 during the ValueAct campaign, giving them an 86.39% return on their investment. Russell 2000. However, following the exit of ValueAct, LKQ returned to its old ways and shifted its focus to mergers and acquisitions, and the stock subsequently fell more than 25% by February 2025, when two new activists entered the stock.
Through an unmotivated campaign and compromise, these activists quickly settled for two board seats for independent directors, and shares have fallen 20% in the eight months since, while the Russell 2000 has risen more than 7% over the same period.
Now, with the stock slightly higher than it was in 2019 when ValueAct entered the picture, a third activist has stepped in to take over where ValueAct left off, calling for LKQ to divest its European operations and refocus on its North American business.
LKQ has always been a company that benefits from simplification and suffers from complexity – and Ananym’s plan appears to be in line with this approach: (i) halting major mergers and acquisitions, (i) divesting the European business and other non-core assets, and (iii) using the proceeds to fund buybacks and reinvest in organic growth in its core NA segment.
Operationally, Ananym’s plan has many benefits. While the US functions as a single market with consistent regulations, Europe consists of a number of nation states, each with their own regulatory framework, making integration much more complex. This creates significant implementation risks, such as the fact that the company still needs to integrate more than 20 ERP systems in 18 different countries.
Divesting Europe will not only leave the company with a higher-margin business with a much larger market share, but will also allow management to devote all of their time and resources to North America. The alternative is to continue to spend a disproportionate amount of time integrating all of its European acquisitions in different European countries from its headquarters in Chicago and Nashville.
The opportunity here is also clear from a valuation perspective. While its industrial distribution peers typically trade at mid-teens or higher forward EBITDA multiples, LKQ currently trades at 7.3x forward EBITDA. This is not just a discount to the market, but also a discount to its historical levels. Even in its complex holding form, LKQ still trades at 10x 10-year historical average EBITDA.
The European business could potentially be sold at 8 to 9x, but even a sale at the company’s current multiple could be useful to unlock value in the North American business, which could be re-ratioed to its historical multiple of 10x EBITDA.
Proceeds from such a sale could enable LKQ to repurchase up to 40% of its outstanding shares; This, combined with NA’s rerating, could easily mean an increase of more than 60% from the company’s current share price.
When determining strategies with similar models O’Reilly, Auto ZoneAnd Original PartsWhile you may find European business attractive, strategists generally prefer clean businesses and this is far from it.
Private equity, on the other hand, enjoys such projects, using their operational and restructuring expertise and flexibility to stay out of the public eye, unlocking these complex assets overtime in a way that is more difficult for public companies to handle.
In its short history, Ananym has gained a reputation for striving to work amicably with management to create value for shareholders, and this situation appears to be no different. The fund is largely complementary to LKQ CEO Justin Jude, who was appointed to the role in July 2024 and has roots in the North American business. Under his brief leadership, the company has already taken steps in the right direction; It announced plans to buy back 14% of outstanding shares and divested non-core assets, such as its self-service recovery business, which was sold in August, to private equity. The company also signaled that its specialty business is on the market and is expected to be sold in the near term. But Jude seems a little more committed to European affairs than to other affairs. It may take some more time to persuade him to withdraw from Europe.
If we’ve learned anything from previous activist campaigns at LKQ, it’s that this company needs a financially astute shareholder representative, not an independent industry executive. They don’t need someone to help them with operations; They need someone to help them model financially, evaluate and potentially implement strategic options, and work with the board to achieve what is best for shareholders.
Given Ananym’s reputation as a friendly activist and their constructive relationship with Jude to date, we think this is an excellent opportunity to place an Ananym representative like Alex Silver on the board, who brings extensive financial and private equity experience and a team of analysts ready to model existing opportunities.
Ken Squire is the founder and president of 13D Monitor, a corporate research service on shareholder activism, and the founder and portfolio manager of the 13D Activist Fund, an investment fund that invests in a portfolio of activist investments.
