We’ve written about Bapcor (ASX: BAP) a fair amount lately. On 7 May we identified the company along with Endeavour (ASX: EDV) as an opportunity in a piece titled 2 undervalued ASX shares where headline issues mask underlying value.

On the 20th of May Bapcor was part of an article titled 4 cheap ASX shares owned by top-rated funds. Finally on June 1st Bapcor was included in our monthly Global Equity Best Ideas list.

It looks our analysts are not the only people who believe the shares represented a good value as private equity giant Bain Capital bid for the company.

Bain Capital is looking to pick up Bapcor on the cheap. While the private equity outfit’s nonbinding, indicative proposal of $5.40 per share is 19% above the undisturbed closing price on June 7, 2024, it’s 29% below our unchanged $7.30 per share fair value estimate.

We think Bain is looking to capitalise on share price weakness following a softer performance in the retail business and management tumult. The proposal is highly conditional and subject to due diligence, unanimous support from the Bapcor board, and regulatory approvals—including from the Foreign Investment Review Board. Bapcor’s board is assessing the offer.

Bapcor is materially undervalued, presenting an attractive opportunity for private equity, strategic owners, and minority investors. A cyclical slowdown in discretionary spending is weighing on Bapcor’s retail business—about 20% of group earnings. We estimate about half of retail earnings are linked to the sale of discretionary products, which is under pressure given the weak consumer backdrop.

We expect demand for discretionary goods to revert to trend levels in the longer term. However, underlying automotive spare parts demand, which underpins the bulk of earnings, remains positive. Cost of living pressures are less likely to affect demand for automotive spare parts, which we expect to be driven by the gradual increase of vehicles on Australian roads.

Uncertainty around who will steer Bapcor back to growth is exacerbating earnings weakness. Would-be CEO Paul Dumbrell’s withdrawal two days before he was set to start took us and the market by surprise in late April. However, we see the management upheaval as likely temporary, and Bapcor’s attractive competitive position remains intact. Bapcor’s trade network, which underpins its narrow economic moat, enables it to supply a wider range of often slow-moving parts more quickly and at a lower cost than smaller competitors.