2015 Mid-Year Dealership Buy-Sell Report

By July 7, 2015The Banks Report
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July 5, 2015 — Through June, dealership buy-sells continues to be vibrant and is on a record pace fueled by a strong May and June coupled with Berkshire Hathaway’s purchase of the Van Tuyl Group in March. Meanwhile, automakers continue to leverage the Right of First Refusal to scuttle deals.

The industry hit the mid-point of the year strong with 60 dealerships changing hands in May and June bringing the total for the first six months to 241.

(To download an Excel file of this year’s acquisitions click: 2015_Dealer_Buy_Sell_June_15_TBR)

 

Large Deals Still Missing

The industry still isn’t seeing large deals completed.

Only two transactions for more than eight stores and only eight that have been for five or more have been signed since January 2013, according to data compiled by The Banks Report.

The data shows the majority of deals are for one to two rooftops — many of which are in smaller markets where a dealer decides to retire and sell to a competitor. The single point owner is becoming more rare, but that doesn’t mean the small town family-owned mentality is going away.

As dealers exit the market, many primarily are selling to small family-owned companies that see an opportunity to grow their portfolios but have little intention of growing beyond that five to 10 rooftop size.

 

Analysis of the Numbers

The breakdown of acquisitions the last two and half years is as follows:

2015 (Through June)

• 241 Dealerships
• 137 Different Transactions
• 109 Different Buyers

2014 (Through June)

• 141 Dealerships (finished the year with 324)
• 112 Different Transactions (finished with 217)
• 89 Different Buyers (finished with 171)

January 2013 through June 2015 (30 month period)

• 745 Dealerships (not including 22 international deals by public dealer groups)
• 468 Different Transactions
• 324 Different Buyers
Just over 41% (309) of the 745 dealerships in the U.S. changing hands the last 30 months have been acquired by 21 dealerships — 15 private groups and six public groups (see more on public acquisition details in the next section).

Only 15 privately-owned groups have added six or more dealerships (for a total of 204) since January 2013:

• Berkshire Hathaway – 84
• RFJ Auto Partners – 20
• Larry Miller Dealerships — 10
• Berglund Automotive – 9
• Greenway Automotive – 9
• Kendall Automotive – 9
• Ken Garff Automotive – 9
• Victory Automotive — 9
• AMSI (Terry Taylor) – 8
• Jim Bozich – 7
• BW Auto Ventures – 6
• New Country/Michael Cantanucci — 6
• Manny Kadre – 6
• Jim Langway – 6
• Suburban Automotive — 6

 

Public Dealer Group Activity

Public dealer groups have acquired 127 stores (105 in the U.S.) since January 2013.

• Group 1 Automotive — 48 (including 22 international deals)
• Lithia Motors — 45 (Includes the 27 dealerships acquired as part of the DCH purchase last year)
• AutoNation — 16
• Asbury Automotive — 9
• Penske Automotive — 5 (Much of Penske’s focus recently has been on acquiring heavy duty truck dealerships, which we do not include in our data)
• Sonic Automotive — 4

Here are the stores the public dealer groups have acquired this year:

AutoNation (six this year):

• AutoNation Volkswagen Mall of Georgia from Gunther Automotive Group
• Mercedes Benz Reno from Arne Hoel and Brett Coleman
• Mercedes Benz San Jose from Ray Beschoff
• Valenica Chrysler Dodge Jeep Ram from California Superstores
• Lyle Pearson Jaguar Land Rover Volvo from Jim Cross, Don Anderson and Brian Cueny (Spokane, WA)
• Look for AutoNation to continue a moderate to brisk acquisition strategy the rest of the year.
• The company has about $900 million in available liquidity.
• AutoNation executives say there is a solid pipeline of deals available, although, sellers’expectations are a unrealistic.

Group 1 Automotive (two this year):

• DFW Audi from Bobby Baillargeon
• Prestige Audi in Miami from Brett David
• Certainly the most active group in terms of number of dealerships acquired with 48 since January 2013.
• The company has more than $277 million in available liquidity.
• Company executives indicate prices sellers are asking are high right now (“stout” is the term CEO Earl Hesterberg used on the most recent call with analysts).
• Yet, we expect Group 1 to remain aggressive in its acquisition strategy. The company is opportunistic and seems to be able to find deals where others might not.

Penske Automotive (one this year):

• Land Rover Darien in Connecticut from the Darien Automotive Group (d.b.a. Miller Automotive Group)
• The company has $600 million in available liquidity.
• Much of its activity in recent months has focused on heavy duty truck dealerships, both in the U.S. and in Australia.
• Expect Penske to continue its highly disciplined acquisition strategy for the near future. Only five stores acquired since January 2013 (one this year) and there is no indication that pace will change.

Asbury Automotive (two this year):

• Capitol City Nissan in Chamblee, GA from Patrick Hoban (renaming the store Nalley Nissan Atlanta).
• Mike Davidson Ford in Jacksonville, FL (renaming it Coggin Ford)
• Late last year, company executives indicated they were going to engage in a more aggressive acquisition strategy (only nine acquired since January 2013). Instead, Asbury bought back $100 million in shares to return value to its investors. Investors like the company — its share price just over $91 — second only to Lithia’s $113 share price.
• Asbury has over $300 million in possible liquidity (with approximately $90 million of that from a credit line for used vehicle inventory) at the end of the first quarter. So it has the cash to buy some deals.
• Executives believe there is a lot of noise in the market, and as a result, some sellers have unrealistic expectations, which is keeping the number of possible acquisitions down.
• Expect the company to maintain its slow to moderate — and disciplined — pace of acquisition.

Lithia Motors:

• Even with no acquisitions this quarter, it has been the second most active since January 2013 with 45 new dealerships purchased.
• The mega acquisition of the 27-rooftop DCH group appears to be going well as Lithia focuses on the F&I and service departments of those stores — areas in which they can drive significantly better profitability. (As we predicted last June — Father’s Day — when we broke the news that Lithia was acquiring DCH, as part of the deal, Lithia agreed to sell other stores — its Honda and Hyundai dealerships in Pocatello, ID have already been sold. Meanwhile, a Honda dealership in Texas will also be sold this year.)
• Had $71 million in immediate available liquidity at the end of the first quarter and could raise another $116 million in 60 to 90 days from un-financed real estate.
• Executives have identified 2,600 dealerships as possible acquisition targets with about 1,200 in tier two smaller markets (where Lithia played mostly prior to the DCH deal) and another 1,400 in larger metro markets.
• Expect continued aggressive acquisition activity. And don’t be surprised if the company is able to pull off another “large” deal (five to 15 store level) — especially if the integration of DCH continues to go well.

Sonic Automotive:

• No acquisitions in the first quarter. Has three open points that are scheduled to be operational in 2016: Mercedes Benz in Dallas; Audi in Pensacola and Nissan in Chattanooga.
• Currently is looking at deals and executives have hinted at being willing to acquire a platform of stores. It closed the first quarter with $243 million in availability liquidity for possible acquisitions.
• Its main focus are the roll outs of its One Sonic-One Experience sales and one-price initiative and Echo Park, its stand alone pre-owned dealership strategy.
• As a result, expect to see minimal acquisition activity for the near future.
• Investors still aren’t sold on Sonic’s strategy. It’s stock price is mired in the low to mid-twenties and has yet to hit the $28 mark. (Share prices for the other five public dealer groups range from approximately $50 to more than $100 a share).

 

Brands

Domestic brands led the charge with number of buy-sells the first half of the year with Chevrolet leading all brands with 32. Ford came in a close second with 30 while Chrysler branded-stores (not including Fiat) saw 20 stores change hands). (Chrysler leads all brands the last 30 months with approximately 80 dealerships changing hands).

Nissan, meanwhile, leads the Japanese brands with 23. Toyota saw 20 buy-sells while Nissan finished the first six months with 18. Subaru eight of its stores with new owners.

Audi and Mercedes Benz led luxury brands with eight dealerships engaged in buy-sells. BMW finished with five.

Of the two Korean brands, Kia saw 10 stores acquired with Hyundai having nine buy-sells through June.

Some dealers don’t seem worried about Volkswagen’s troubles as 11 stores changed hands. The same is true for Volvo as nine dealers acquired new stores hoping to cash in on the Chinese/Swedish automaker’s planned product blitz the next few years.

 

Right of First Refusal

Although the use of Right of First Refusal (Buyers/Sellers Both Hurt by Right of First Refusal) has not been widespread, certain manufacturers continue to use it to scuttle deals.

Recently, Audi reportedly ROFR’d a deal in the Northeast, keeping a private equity group looking to buy stores from buying the franchise.

Lexus also ROFR’d a deal, blocking the sale of its store in Glendale, CA to the U.K.-based Pendragon Group. The group, which has 229 total new car franchises has a presence in the U.S. with with 21 total points — nine of which are in Southern California.

The truth is, Audi, General Motors (which ROFR deals in order to bring minority owners), Toyota and Mercedes Benz seem to be the most aggressive automakers when it comes to using the tool to block sales.

 

Private Equity

From our conversations with different investment bankers, dealers and brokers, we estimate approximately 30 different private equity/family office type firms have either acquired or are engaged in discussions to acquire dealerships.

Since Automotive News reported that George Soros’ investment fund was talking to dealerships (Read our take: Big Money at NADA) the industry has been waiting for the first big deal from private equity.

We may never hear of a deal happening even if it does. Many private equity firms prefer to keep their investments quiet and may not publicize what they buy.

One interesting development is the increased willingness of brands such as Toyota and Honda to allow private equity firms come in as owners. Already this year. two Honda stores and at least two Toyota stores have been acquired by private equity (not including the stores acquired by Berkshire Hathaway Automotive).

The most active firms buying or investing in stores currently are the Jordan Company who partnered with Rick Ford to create RFJ Auto Partners (first reported by The Banks Report in November 2014). RFJ has acquired more than 20 dealerships mainly in tier two markets including a Honda dealership in Missouri and a Toyota dealership in Oklahoma.

A second firm is the New York-based GPB Capital which is helping inance Patrick Dibre’s acquisitions — the most recent being Potamkin’s Honda store in Miami last month.

A third group, Unique Investment Corp. started by John Makoff, acquired three stores last December. The model is to acquire small stores to provide them with some negotiating power and back end consolidation.

Earlier this year, Taseer Badar, founder of ZT Wealth in Houston, bought four dealerships in Fort Walton Beach, FL.

Meanwhile, we are expecting to see more private equity/family office deals happen over the next several months.

 

Recap and Rest of the Year

1. For the most part, dealership buy-sell activity has been consistent and brisk the last 18 months.
2. Much of the activity is coming from dealers in tier two and tier three markets who are buying out competitors in their markets.
3. Regional powerhouses continue to expand into new markets. Some examples include Larry H. Miller; Ken Garff; IndiGO; Hertrich; Victory; Greenway; Priority. Others such as Suburban, Holman, Ciocca are expanding in their local markets.
4. Dealers are maintaining a disciplined approach with acquisitions and are careful not grow too fast. Not only are acquisitions complicated, so is the process of incorporating a new purchase into the group’s culture.
5. The noise surrounding Warren Buffett’s entry into the market along with reports of George Soros’s private equity fund looking to invest or buy stores, has created a temporary bump in sellers’ expectations, which has kept several deals from being completed.
6. Yet, prices are as high as they’ve ever been. But we believe the window is beginning to narrow for what has been a seller’s market. As car sales begin to plateau in the next year or so (as many analysts believe) buyers will be less willing to pay the higher prices for stores. Also, at some point next year, interest rates will likely start to increase (although, we’ve been saying that the last two years).
7. Through the end of this year, there will be a steady flow of acquisitions being completed. And we may see two to three big transactions involving five or more stores get announced. (We know of at least two that could be announced in the next few weeks. One is the Manfredi group in Staten Island which reportedly will close the sale of nine of its 10 stores in the next two weeks (Manfredi is keeping the Chevrolet store, we are told).
8. It’s a good time to be an Audi, BMW or Mercedes Benz dealer. Prices being paid for these franchises are extraordinarily high because demand is high. The prices we’re hearing are ranging from $20 million to nearly $80 million for single point franchises (that includes the real estate).
9. The data shows the majority of deals are for one to two rooftops. Big deals are few and far between — only two transactions for more than eight stores and only eight that have been for five or more have been signed since January 2013.
10. Including the Manfredi deal, we’re expect the sale of a BMW/Mini store in New Jersey to close any day now. Also in New Jersey, the sale of Brad Benson’s Hyundai store is awaiting approval from Hyundai (Benson reportedly was forced to sell following revelations he had used floorplan money for personal expenses).

 

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Cliff-BanksAbout The Banks Report:

Designed for top automotive executives, dealers, industry analysts and investors who want to cut through the noise and get an accurate picture of what’s going on in the Automotive Retail space, the Banks Report is an online source that provides subscribers with daily insight into the top news stories of the day.

The Banks Report was created by Cliff Banks, an award-winning journalist with more than 20 years in the automotive retail space. As an editor of two automotive-related media companies, he built a vast network of sources ranging from CEOs to service technicians at the dealership. There’s no one better at connecting the dots and putting the news into perspective.