Company: LKQ Corp. (LKQ)
Business: LKQ engages in the distribution of replacement parts, components, and systems used in the repair and maintenance of vehicles and specialty vehicle aftermarket products and accessories. The company operates through 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 refinishing vehicles; mechanical automotive parts and accessories; salvage products, including mechanical and collision parts comprising engines; transmissions; door assemblies; sheet metal products, such as trunk lids, fenders, and hoods; and lights and bumper assemblies. The company also provides scrap metal and other materials to metals recyclers; precious metals contained in certain of our recycled parts, such as catalytic converters; and brake pads, discs and sensors, clutches, steering and suspension products, filters, and oil and automotive fluids, as well as electrical products. It serves collision and mechanical repair shops, and new and used car dealerships, as well as retail customers. LKQ was incorporated 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: n/a
Activist Commentary: Ananym Capital Management is a New York-based activist investment firm which launched on Sept. 3, 2024, and is run by Charlie Penner (a former partner at JANA Partners and head of shareholder activism at Engine No. 1) and Alex Silver (a former partner and investment committee member at P2 Capital Partners). Ananym looks for high quality but undervalued companies, regardless of industry. They would prefer to work amicably with their portfolio companies but are willing to launch a proxy fight as a last resort. According to their most recent 13F filing, they manage $260 million across 10 positions.
What’s happening
On Oct. 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. Its core North America segment (40% of revenue and 55% of earnings before interest, taxes, depreciation and amortization) primarily supplies aftermarket collision parts, such as mirrors and bumpers.
The Europe segment (47% of revenue/38% of EBITDA) primarily supplies mechanical and suspension products but contains a wide variety of other replacement and maintenance products. Although the European business is slightly larger by revenue, the North American business has significantly higher margins and a much larger market share compared with its peers.
Lastly, the specialty segment (13% of revenue/7% of EBITDA) provides aftermarket parts for the RV market. Originally just a U.S. aftermarket parts business, the company began aggressively pursuing acquisitions in Europe starting in 2011, shifting from a focus on recycled parts consolidation to building and integrating a European footprint.
Moreover, these two businesses are not nearly as similar as they sound, in North America they do primarily aftermarket collision parts like mirrors and bumpers and in Europe, it’s primarily mechanical suspension and things under the hood.
LKQ is no stranger to shareholder activism. In September 2019, when the stock was trading at $27 per share, ValueAct Capital engaged the company and settled for a board seat for one of its partners. Through this campaign, ValueAct was able to usher in a new wave of operational discipline, where instead of focusing on European M&A, LKQ paused large acquisitions and shifted its focus to growing the company’s free cash flow and executing buybacks at an attractive discount.
The results of this campaign speak for themselves, as LKQ’s share price rose to over $60 during ValueAct’s campaign, giving them an 86.39% return on their investment versus 16.15% for the Russell 2000. However, following ValueAct’s exit, LKQ returned to its old ways, shifting their focus back to M&A, and the stock had subsequently declined more than 25% by February 2025, when two new activists entered the stock.
In an uninspired campaign and settlement, those activists quickly settled for two board seats for independent directors and the stock has declined by 20% in the eight months since while the Russell 2000 has been up more than 7% during the same time.
Now with the stock just slightly higher than it was in 2019 when ValueAct engaged, a third activist has entered to take over where ValueAct had left off, calling on LKQ to divest its European operations and refocus on its North American business.
LKQ has always been a company that has benefited from simplification and harmed by complexity – and Ananym’s plan seems to align with this approach: (i) halt major M&A, (i) divest the European business and other non-core assets, and (iii) use the proceeds to fund buybacks and reinvest in organic growth in the core NA segment.
Operationally, there are several benefits to Ananym’s plan. While the U.S. functions as a single market with consistent regulations, Europe is a series of nation states each with their own regulatory framework, making integration far more complex. This creates meaningful execution risks, exemplified by the company still needing to integrate more than 20 ERP systems in 18 different countries.
Not only would divesting Europe leave the company with a higher margin business with a much larger relative market share, but it would also allow management to devote all their time and resources to North America. The alternative is to continue to focus a disproportionate amount of time on integrating all the European acquisitions across the different European countries all from their headquarters in Chicago and Nashville.
The opportunity here is also clear from a valuation perspective. Industrial distribution peers typically trade at mid-teens or higher EBITDA multiples, while LKQ currently trades at 7.3x forward EBITDA. Not only is this a discount to the market, but to its historical levels, as even in its messy conglomerate form, LKQ has still traded on a 10-year historical average of 10x EBITDA.
The European business could potentially be sold at an 8 to 9x multiple, but a sale even at the company’s current multiple would be beneficial to unlocking value in the North American business, which could re-rate to its historical multiple of 10x EBITDA.
The proceeds from such a sale could enable LKQ to repurchase up to 40% of its outstanding shares, which, when combined with the re-rating of NA, could easily translate to more than 60% upside from the company’s current share price.
While strategics with similar models, such as O’Reilly, AutoZone, and Genuine Parts, may find the European business appealing, strategics generally prefer clean businesses and this is far from that.
Private equity, on the other hand, feasts on these types of projects, using their operational and restructuring expertise and flexibility of being out of the public eye to unlock these complex assets overtime in a way that is more difficult for public companies to address.
In its short history, Ananym has established a reputation for striving to work amicably with management to create value for shareholders, and this situation appears to be no different. The fund has been largely complimentary of LKQ CEO Justin Jude who was named to the position in July 2024 and has his roots in the North American business. Under his short leadership, the company has already taken steps in the right direction — announcing plans to repurchase 14% of outstanding shares and divesting non-core assets such as its self-service salvage business that was sold in August to private equity. It has also signaled that its specialty business is on the market and it’s expected to be sold in the near term. However, Jude seems to be a little more attached to the European business than these other businesses. Persuading him to divest Europe may take a little more time.
If we learned anything from the previous activist campaigns at LKQ, this company needs a financially astute shareholder representative, not an independent industry executive. They do not need someone to help them with operations, they need someone to help them financially model, evaluate and potentially execute strategic options and work with the board to arrive at what is best for shareholders.
Given Ananym’s reputation as an amicable activist and their constructive relationship with Jude thus far, we think this is a perfect opportunity to put an Ananym representative on the board like Alex Silver who has extensive financial and private equity experience and brings a team of analysts ready to model available opportunities.
Ken Squire is the founder and president of 13D Monitor, an institutional research service on shareholder activism, and the founder and portfolio manager of the 13D Activist Fund, a mutual fund that invests in a portfolio of activist investments.
