When Motorcar Parts of America announced this month that it would buy Toronto auto parts maker Fenco in a $5 million all-stock deal, the investor reaction appeared unusual.

The Torrance-based company has a market cap of just $179 million, and the deal would be dilutive to existing shareholders, requiring the issuance of 300,000 shares to pay for it.

Yet the stock jumped 8 percent to $14.65 on May 9, the first trading day after the deal was announced. Shares further rose to close at $14.84 on May 12.

At least one analyst wasn’t surprised by the deal or investors’ response.

“This fundamentally changes Motorcar’s business,” said Jimmy Baker, an analyst with B. Riley & Co., a West L.A. boutique investment bank that has a “buy” rating on the stock.

The merger will immediately broaden Motorcar’s product line, and should also more than double its revenue, which is expected to hit about $160 million in the fiscal year ended March 30. Fenco’s annual revenue is about $200 million.

Baker noted that Motorcar had signaled it was interested in Fenco last year when it loaned the company $1.9 million with an option to take ownership.

Motorcar sells what analysts call under-the-hood items such as remanufactured starters and alternators; Fenco makes under-the-car parts such as clutches, drive shafts and water pumps. Both companies do business only in the United States, Canada and Mexico, and distribute through retailers such as Napa Auto Parts, Pep Boys and AutoZone. However, Fenco also distributes through warehouses that service professional mechanics.

“That’s been a side of the market that Motorcar hasn’t been as successful as,” Baker said.

Motorcar did not indicate whether Fenco is profitable, but the company is projecting the merger will save some $20 million in annual costs after two years through consolidation, including moving Fenco’s production to a single plant in Monterrey, Mexico, that Fenco operates. Fenco also has plants and distribution centers in Pennsylvania and New Hampshire, said Motorcar Chief Executive Selwyn Joffe.

“We’re able to leverage our business model by applying it to less efficient models. We achieve greater returns than what we’re paying,” said Joffe, who has engineered two other acquisitions since 2008.

Motorcar has been profitable. Its reported net income of $3.76 million in the fiscal third quarter ended Dec. 31, compared with $2.15 million a year earlier. Revenue rose 13 percent to $41.3 million.

Mexican connection

Motorcar moved most of its remanufacturing work from Torrance to a plant it opened in Tijuana in 2009, and has a history of acquiring other companies and consolidating operations.

Motorcar acquired Pompano, Fla.-based Suncoast Automotive Products in August 2008 and East Berlin, Conn.-based Reliance Automotive in 2009. The companies also remanufactured alternators and starters. After both deals, Motorcar shut plants down and moved production to Mexico.

Baker said Motorcar was clearly looking to diversify through the Fenco acquisition.

“Fenco participates in categories that are exhibiting higher growth rates, such as brake components, when compared to Motorcar’s rotating electrical business (starters and distributors),” he said.

Baker also said that with the recession the number of older cars on the road has increased, which should boost demand for both the under-the-hood and under-the-car parts that are now in Motorcar’s product line.

“We see this aging car fleet providing a four- to five-year cycle of strength for the industry,” he said

Joffe acknowledged that Fenco was in a faster-growing segment of the auto parts market, but he said it was an inefficient operation, with too many hands touching products before they reached customers.

“Their logistics model has them moving products three or four times,” he said.

He noted Fenco will receive a part to be remanufactured in one location, sort it, move it to a factory for remanufacturing, then to a warehouse and then to a customer.

“We can cut two pieces out of that chain,” he said, explaining parts can be sorted and remanufactured in one facility.

Joffe also said the Fenco deal paves the way to make further acquisitions.

Ruben Barrales, president and chief executive of the San Diego Regional Chamber of Commerce, said he is not surprised that American companies still find it financially rewarding to move work down to Mexico, despite the drug wars.

“It’s fair to say that the amount of investments moving down there has slowed, but in Tijuana and Baja, the situation has improved dramatically in the last few months and things are looking better,” Barrales said. “I’m not aware of any problems that legitimate business people and employers are facing doing business in Tijuana.”

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