This year's buy-sell market is on track to be the most active since 2004, in both number of deals and total dollars, two newly released reports say.
But sellers' pricing expectations may have climbed to levels that are "likely unsustainable," said Erin Kerrigan, managing director of Kerrigan Advisors, a buy-sell advisory firm in Irvine, Calif., and author of one of the studies.
The reports detailed the dealership buy-sell frenzy in the first nine months. They concluded that U.S. dealership acquisition activity will remain strong, although blue-sky values for most brands in the third quarter were little changed from year-earlier levels.
Total buy-sell spending in 2014, by both public and private dealers, will be between $2 billion and $2.5 billion, Kerrigan predicted. She said more than 200 deals will be done by year-end.
Both Kerrigan's report and one from Alan Haig, president of Haig Partners, a dealership buy-sell advisory firm in Fort Lauderdale, Fla., showed double-digit percentage increases in dealership acquisition activity in the third quarter, although their methodologies and numbers differed slightly.
Haig said the total number of private and public dealership acquisitions rose 69 percent, to 191 deals, in the first nine months from the year-earlier period.
Kerrigan wrote in her report that the total number of "completed dealership transactions through Oct. 1" rose 89 percent to 148. That includes Lithia Motors Inc.'s purchase of DCH Auto Group Inc., which closed Oct. 1.
Haig said the fourth quarter is shaping up to be "truly massive."
"Lithia closed the DCH acquisition, which was reported as over $300 million, AutoNation closed the acquisition of Barrier Motors, which could exceed $200 million, and Asbury announced a couple of acquisitions," Haig wrote in his report.
"These transactions could put the total for all acquisitions in 2014 at a little over $1 billion," just for purchases by the publicly traded dealership groups.
Kerrigan attributed the increased activity this year to the "rise in sellers entering the market, most of whom were attracted to today's high blue-sky values." Blue sky is the intangible value of a dealership, expressed as a multiple of adjusted pretax income.
Kerrigan said pricing got a boost from high-profile deals such as Lithia-DCH and Warren Buffett's agreement to buy the Van Tuyl Group.
Kerrigan's Blue Sky Report said some sellers expect Buffett's Berkshire Hathaway Inc. and other buyers will pay steep premiums to buy dealerships. Not so, she said.
"Warren Buffett did not become one of the wealthiest investors in the world by overpaying for businesses," Kerrigan wrote. "While Berkshire's market entrance will certainly create an attractive exit opportunity for many valuable dealerships and dealership groups, it will not likely result in an increase in blue-sky multiples."
Haig said the average blue-sky multiple for all franchises, unweighted for sales or buy-sell volume, was 4.4 at the end of the third quarter, little changed from a year earlier.
Haig raised the low end of his estimated blue-sky range for Mercedes-Benz, to 6 from 5.5, and for BMW, to 5.5 from 5, vs. his second-quarter estimates. He trimmed Mini's blue-sky range to 3-4, from 3.5-4.5 a year earlier.
Haig said no Mercedes dealership has sold for less than six times blue-sky value. Prices have been buoyed by the brand's continued rising sales and ongoing facility improvements.
Regarding BMW, Haig cited strong sales, several redesigned vehicles coming and less costly facility improvements going forward. But with sales down for Mini amid a shift to larger vehicles, he said some buyers believe the brand "has lost it way."
Kerrigan raised the top end of Mazda's blue-sky range to 3 from 2.5, "in recognition of some recent sales improvements and expected new product launches."