Welcome to Automotive Retail, Mr. Buffett

By October 8, 2014The Banks Report

October 2, 2014 – Warren Buffett’s announcement today that his Berkshire Hathaway Group is acquiring the Van Tuyl Group Group has the potential to change the market over the next year. Certainly, adding his iconic stature to an industry that already has business luminaries such as Roger Penske and MikeJackson only adds further validation that automotive retail is one of the country’s most important sectors. 

Buffett was on CNBC this morning with Van Tuyl Chairman Larry Van Tuyl to announce the acquisition.

He is coming into one of the most competitive business sectors in the U.S. There are 17,905 dealerships in the country with the top 100 groups owning approximately 3,000 of those stores.

In Van Tuyl, Berkshire Hathaway is getting one of the best run groups in the country. Van Tuyl has only 78 dealerships at the moment, but the company is the nation’s largest private dealer group (fifth largest overall) according to the Ward’s MegaDealer 100, generating more than $8 billion in annual revenue.

The second and third largest private groups — AMSI and Hendrick Automotive — each have approximately 93 dealerships but generate about $500 million to $1 billion less a year in total revenue.

The move is sending shock waves through the industry as it comes on the heels of Lithia Motor’s completion of the DCH Automotive Group deal yesterday — what had been one of the biggest deals in automotive retail history at more than $360 million — not including the real estate. (Click to view The Banks Report Mid-Year Update on Dealership Buy-Sell Activity).

Buffett declined to comment on what Van Tuyl’s valuation is. AutoNation, with more than $17 billion in revenue, has a market cap of about $5.8 billion. Our guess is that Buffett ends up paying somewhere in the $2.5 billion to $3 billion neighborhood for Van Tuyl — other estimates peg the deal to be between $4.5 billion to $4.8 billion (Lithia Motors just paid $366 million — not including the real estate — for the 27-store DCH Automotive Group. DCH generates about $2.3 billion a year in revenue but its net profits were less than 1% — less than half the industry average).

Van Tuyl employs a management structure that includes general managers having a minority stake in the business.

Long time and respected industry veteran Jeff Rachor, who has helped lead Van Tuyl the last few years will serve as CEO. Larry Van Tuyl will remain as chairman of the group. The group will change its name to Berkshire Hathaway Automotive and will be headquartered in Dallas.

The deal is subject to manufacturer approvals — which are rarely easy. But automakers would be foolish to try to block this deal.

Buffett’s announcement today sent automotive retail stocks surging and sends a strong signal that he believes in the future strength and growth of the industry. Analysts and investors had cooled on automotive retail the last several weeks. Some analysts, in private conversations with The Banks Report, cited concerns about increased pressure from regulatory issues with the CFPB, exposure from increased subprime business, and the possibility the industry is at, or nearing a peak in car sales.

Buffett addressed some of those concerns saying he believes there is long term value in automotive dealerships, and the market seems to be following his lead. He also was attracted by the fact dealer groups rely on floor plan capital from lenders to essentially operate, meaning dealers don’t need to use much of their own capital.

CNBC hosts asked Buffett about AutoNation, whose Chairman and CEO MikeJackson appeared on the program earlier today, and whether it was the nation’s largest group, and Buffett’s response, “Not for long.” Buffett expects to scale the business in a big way and says the group will buy “a lot more stores.”

Jackson, meanwhile, emailed the show welcoming Buffett to the industry while congratulating him on the deal. Jackson also mentioned that Bill Gates, a close friend of Buffett’s, is a 15% stake holder in AutoNation. Eddie Lambert, best known for his involvement in Sears, also is a big investor in AutoNation.

Buffett responded saying Jackson is a “smart businessman who has built a great company” and acknowledged that Gates probably had made a lot of money investing in AutoNation.

Buffett has a lot of work to do before catching AutoNation, which has more than 230 stores generating more than $17 billion a year in revenue. Penske Automotive, the second largest dealer group in the country, will generate close to $16 billion this year with approximately 200 dealerships.

Penske executives speaking on behalf of Roger Penske, who was unavailable this morning, tell The Banks Report, that, “Warren Buffett is an icon in the business world and his coming into the automotive retail space is a continued validation of the sector and its enormous potential.”

Jackson and Penske have both been the industry’s de facto leaders and have served as effective spokesmen on national and political issues affecting car dealers. Adding Buffett to the mix will only enhance the credibility of the industry.

There is speculation that the announcement could set off a firestorm of acquisitions over the next several months. Our answer to that is, yes and no.

The media likes to beat on dealerships and the lack of customer-friendly practices, but from a macro business perspective, investors typically have viewed automotive retail as an attractive investment — partly due to the caliber of leadership from folks such as Jackson and Penske.

Despite that, investors have found getting into the industry can be difficult. Rachor himself led a failed effort by Michael Dell’s private equity group MSD Capital in 2006 and 2007 to enter the industry. Reportedly, MSD had agreed in principal to acquire the publicly-held Asbury Automotive Group only to have the deal shot down by manufacturers. Dell isn’t alone. There have been others that have tried and failed to enter the market.

But Buffett is a unique investor and one that automakers should welcome to the industry with open arms. We  wrote a couple of weeks ago about a new breed of investor coming into the industry. 

These investors are not the typical private equity type that looks to quickly flip a business. Instead, like Buffett, these investors are looking for slow growth, stable companies in which to park their money;

Don’t expect a big move from private equity firms getting into the industry. Automakers won’t allow it. They want investors that are stable and in it for the long haul — investors like Buffett.

We do, however, believe there will be at least two or three outside investors similar to Buffett that will get into the business in the next six to 12 months. And they’ll likely will invest in a big way.

From a seller’s perspective, the news of Buffett’s entrance has to be good. Look for multiples to increase over the next three to six months. Buffett will probably have his hands full getting this deal across the finish line, but once he does, he’ll have his pick of dealerships to acquire — not to mention the nearly $55 billion in cash he’s sitting on. Don’t be surprised if there is another big deal or two that he announces in the next 12 months, including a public dealer group.

Also lurking in the background is Buffett’s 10% investment (one he made in 2008 through MidAmerican Energy) with Chinese electric automaker BYD, who has made no secret that it plans to be in the U.S.with four models by the end of 2015.

Meanwhile, the acquisition market is hot with more than 200 dealerships have changed owners in the first three quarters of 2014 according to data compiled by The Banks Report (not including the Van Tuyl deal).

Since the beginning of 2013, more than 400 dealership buy-sells have occurred and there is no sign of it slowing down.


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Cliff Banks

About 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.