First Warren Buffett. Then George Soros. Who's next?
Outside investors are shopping for auto retailers in greater numbers -- and with larger checkbooks -- than the industry has ever seen.
Buffett: Grabbed headlines
Their activity comes at a time when many dealers are approaching an age when they're ready to sell out and when some privately held retail groups have grown to a size that puts them beyond the reach of all but their most well-financed peers.
The new buyers also are making some automakers nervous and could face factory-constructed hurdles to entering the retail sector.
The list of would-be buyers includes private equity firms, so-called family offices seeking to invest a wealthy clan's money and publicly traded companies.
• Representatives of billionaire George Soros' personal investment fund, Soros Fund Management, met with dealers at the National Automobile Dealers Association convention in San Francisco late last month. Individuals who attended a private dinner hosted by buy-sell advisory firm Bel Air Partners said those representatives indicated that they were ready to invest up to $1 billion in dealerships and would prefer to do one or two big deals rather than dozens of small ones. A Soros representative did not respond to requests for comment.
• ZT Wealth, a Houston wealth-management concern, closed on an $80 million purchase of Quality Imports Inc.'s Mercedes-Benz, BMW, Toyota-Scion and Mazda dealerships in Fort Walton Beach, Fla., late last month.
• Warren Buffett grabbed the headlines in October when his Berkshire Hathaway Inc. said it would buy Van Tuyl Group, the nation's largest privately held dealership group. The price tag wasn't disclosed, but estimates put it north of $4 billion. Buffett promptly said he wants to buy more stores.
The outside buyers view auto retail as a place to generate returns that are higher than other industries offer. Also, the growing consolidation of car dealerships into large retail groups makes entry into auto retailing in a big way easier now than in the past, said Alan Haig, president of Haig Partners, a dealership buy-sell advisory firm in Fort Lauderdale, Fla.
"These groups are now big enough where the founder can exit and sell his shares to a new family office" looking for a big purchase, Haig said. "And the business he built can continue on without him because the management team hasn't changed."
More buyers are in the wings.
Alan Haig, Haig Partners: "These groups are now big enough where the founder can exit and sell his shares to a new family office [looking for a big purchase]. And the business he built can continue on without him because the management team hasn't changed."
For example, a panel at the Auto Team America Dealership Buy/Sell Summit in San Francisco just before the NADA convention included, as potential buyers, representatives from Lindsay Goldberg, a New York private equity firm; Open Road Capital, an investment bank near Washington, D.C.; and Fremont Private Holdings, a family office that invests for the family behind construction giant Bechtel Corp.
Scott Earthy, managing partner at Fremont, declined to comment.
Russ Triedman, a partner at Lindsay Goldberg, said the firm, which has $10 billion under management, is focused on larger deals and is looking to invest $100 million to $200 million in auto retail upfront and as much as $500 million over time. The firm's first foray into a buy-sell deal got near the closing stage last summer before the sellers pulled out, he said.
Open Road has lined up $300 million it can tap for dealership investments and has two multistore acquisitions signed and awaiting automakers' approval, co-founder Tim Batchelor told Automotive News.
Getting that approval isn't always easy.
"It's kind of a unique period because the manufacturers are getting their arms around what all this means and trying to decide whether this is consistent with their goals," Open Road co-founder Eric Chelline said.
Tim York, managing partner of accounting firm Dixon Hughes Goodman, has been working with some of the outside private equity groups and family offices that are shopping. He tells those clients to figure out a plan for day-to-day management involving people with dealership operational experience because the automakers won't approve a sale without it.
He said: "If you don't have a professional person, you don't even need to apply."
Joe Aboyoun, a Pine Brook, N.J., lawyer who specializes in buy-sell deals, said that when some sellers have broached the idea of private equity buyers to the manufacturers, "the initial reaction is not good."
His summary of automakers' responses: "'We do not want this kind of arrangement. We'd rather have another dealership group. We may exercise our right of first refusal and take over the deal. If the existing manager wants to stay on, we'll give them another partner, but it's not going to be an equity fund.'"
During Bel Air Partners' private dinner during the NADA convention, Soros Fund representative Vipul Tandon fielded questions on the right-of-first-refusal clause.
That clause allows a manufacturer to reject a buyer in a buy-sell deal, effectively terminating the already negotiated transaction, and instead propose another buyer under the same terms that were negotiated with the first.
Tandon's reaction to right of first refusal being a roadblock to any deal was "somewhat equivocal," said a source who was one of the 40 dinner attendees.
"They recognized it as an issue but said that it was manageable with good pre-screening with certain manufacturers," the source said. "If they really wanted to buy Lexus or BMW stores, for example, they would or maybe have already had that conversation with the manufacturer first. It's a manageable risk."
Another source at the dinner said that because Soros Fund people would not want to run the dealership, they do not foresee a manufacturer objecting to the fund as a buyer.
Outside money buying all or part of dealerships is nothing new.
For example, Microsoft Corp. founder Bill Gates, through his Cascade family office, owns 14 percent of AutoNation Inc.
DCH Auto was formed by a Hong Kong food and textiles company that sought new opportunities in the U.S. Its investors reaped good profits from auto retailing, starting when the company opened its first dealership in 1977 until it sold out to Lithia Motors Inc. last year.
And Leucadia National Corp., a public investment company sometimes described as a mini Berkshire Hathaway, has financed the recent rapid growth of Ken Garff Automotive Group of Salt Lake City. Other examples abound.
What is new is the size of the investments. The challenge that Soros' fund, essentially a family office, faces is that "they would really prefer to write very large checks," said Ryan Kerrigan, managing director of buy-sell advisory firm Kerrigan Advisors in Irvine, Calif. "There are only so many groups that would fit their ideal parameters."
That has some potential sellers wondering whether these new investors might be more inclined to overpay.
On the one hand, most sellers realize that Warren Buffett didn't build his reputation as a savvy investor by overpaying. On the other, some buyers may be so eager to do a deal soon that they won't dicker too long.
Dixon Hughes Goodman's York said: "These groups are feeling the pressure, if they're going to get into the space, to buy."
Here's why: Private equity firms are collecting money from investors, who understandably want to see it generating returns as soon as possible. With that pressure, some of these potential acquirers are willing to pay more than the market valuation, York said.
York also noted that the buyers that are getting automaker approval have longer horizons for realizing a return on their investment, such as family funds. In contrast, many private-equity investors have a short, five- to 10-year, investment horizon.
For that reason, Kerrigan said: "Family offices are much more logical buyers in auto retail than private equity." He said he has spent "a lot of time" with the Soros people, who represent what is in effect a family office.
The months ahead will show whether dealership valuations are pushed broadly higher by bidding from these new investors. But few advisers see the already-hot buy-sell market being pushed into overdrive.
"In 2015, I will guess there'll be fewer than 10 investments made by newcomers" out of the hundreds of deals done, Haig said. "So it's not yet transforming the business."
But the new money can alter dealers' attitudes, he added. "What is exciting about it to dealership groups," he said, "is they have a new exit strategy."
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