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A New Kind Of Buy-Sell Player

  • October 19, 2015
  • Amy Wilson & Jamie LaReau
  • Automotive News

Bechtel family office buys Morrie's group

With the Bechtel family's majority purchase of Morrie's Automotive Group in Minneapolis last week, a new kind of buyer emerges in the dealership acquisition market.

Family offices -- firms set up to invest the money of wealthy families -- are outside buyers that may appeal to both selling dealers and the automakers that must approve the acquisition.

"I don't see these kinds of buyers displacing the public companies, but I do see them as a very attractive supplement," said Alan Haig, president of Haig Partners, a buy-sell advisory firm in Fort Lauderdale, Fla. "There is an increasing number of very wealthy families in this country that are deciding to make direct investment in other companies rather than investing in the stock market."

Haig advised Fremont Private Holdings, which is buying out Morrie Wagener's share of his 11-store group.

Scott Earthy, managing partner at Fremont, which invests for the family behind construction and engineering giant Bechtel Corp., said family offices "can be a tremendous option because [they] have more flexibility in their capital." That flexibility can make them a good option for dealers interested in selling their stores.

Family offices have ready access to large amounts of capital. They generally have open-ended investment timelines vs. the shorter, defined timelines of private-equity firms. Many want to work with established management, potentially allaying concerns about their lack of industry experience. They have little exposure to auto retail, so automakers needn't worry about an overconcentration of stores with a single buyer.

Wagener, his family and Morrie's Automotive CEO Karl Schmidt spent the last two years talking to private-equity groups, privately owned dealership groups and several of the public dealership groups about a potential sale. But, Schmidt said, they could not find the right buyer that would provide capital for growth while leaving the operations and culture intact.

Then in January, Wagener and his daughter, Cindy Wagener Robin, the dealership group's vice president of operations, found the perfect suitor at a buy-sell conference held ahead of the National Automobile Dealers Association convention in San Francisco. Earthy spoke on a panel about Fremont's interest in buying into dealerships.

"We were very impressed with Fremont's approach," Wagener Robin said. "They invest for the long term, and they don't look for a short-term profit on an investment. They let the business do what it's always done because they recognized that was the character and what made it truly valuable."

The two parties began discussions in the spring and unveiled the deal last week.

Morrie's has 11 rooftops and 10 separate franchises. It sells about 26,000 new and used vehicles a year and generates about $600 million in annual revenue. The Morrie's brand name and its Buy Happy approach -- which includes one-price selling, no-charge oil changes and car washes, and a free lifetime powertrain warranty with every new vehicle -- will continue. Financial terms were not disclosed.


New route?

Schmidt, who already has a share of the Morrie's group, and his management team will run the business. Schmidt will be an owner with Fremont, but he declined to disclose his stake. It's still being settled, he said, but it will be "significant." He said both parties' stakes will "evolve" equally as the group acquires more dealerships.

That ownership structure points out another benefit to a family office buyer: It can be a way for a favored manager to take over. In today's market, high valuations often price dealerships out of the range of a top manager who in decades past would have been the likely successor in the absence of a son or daughter to take over.

The Morrie's deal, subject to approval by automakers, is expected to close late this year or early in 2016. Earthy said he looks forward to meeting with manufacturers during the approval stage to explain Fremont's approach to business. Fremont studied the industry for a couple of years before it made the deal with Wagener, he said.

"We intend to be in the industry for a long time," Earthy said. "We are not running the business day to day. We're going to help. We're active investors. We're going to bring additional resources, and we want to work with the manufacturers. We really, really do."

The Morrie's purchase could be a springboard for more expansion.

While Fremont hasn't earmarked any specific investment amount for auto retail, it is open to purchasing more dealerships, Earthy said. That could include buying dealerships in the upper Midwest, as single stores or groups, and adding them to Morrie's.

Schmidt said: "We want to be very strategic." Morrie's biggest sales volume comes from its two Ford stores. Therefore, a Chevrolet store is a "natural target" for acquisition since that brand is a conquest rival to Ford, he said.

"We'd want to add brands that our customers are defecting to." Likewise, Morrie's would like to add more luxury brands to its mix, he said. It currently sells Cadillac, Lincoln, Aston Martin, Maserati and Bentley, plus nonluxury brands Hyundai, Mazda, Nissan, Subaru and, of course, Ford.

Fremont also would entertain buying a larger group that can serve as a platform in another region of the country. It wants to keep day-to-day managers and is open to dealers who want to sell down their ownership interest over a long period of time, Earthy said.


More coming

Family offices are not unheard of in automotive retail. The most prominent example is also in the Minneapolis-St. Paul metro area: the Pohlad family, which made its fortune in banking and beverages and owns the Minnesota Twins baseball team. It began buying dealerships in 2008. The family's Carousel Motor Group now operates 11 car dealerships. The family office of Microsoft founder Bill Gates also holds a significant stake in AutoNation Inc., the country's largest new-car retailer.

Other family offices have been sniffing around the dealership acquisition market for a while.

Billionaire George Soros sent representatives from his family office to meet with dealers at the NADA convention this year. They told individuals who attended a private dinner hosted by buy-sell advisory firm Bel Air Partners, of Hopewell, N.J., that they were ready to invest up to $1 billion in dealerships.

Sheldon Sandler, a Bel Air managing partner, said there will be an uptick of nontraditional investors buying into car dealerships, but it will be minimal.

"It's not a trend or phenomenon. But is it an element of what's going on? Yes, but only a piece of it," he said. "It won't be a dominant force."

Haig said: "While I don't see a flood of family offices rushing into our industry, this is an exciting precedent that shows that it's possible for thoughtful and well-capitalized outsiders to partner with successful management teams to buy big groups.

"I suspect some other people are pretty far up the road and we'll see some other announcements in the next six months or so."

 

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