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Buy-sell market: Deep pockets fuel bulk deals

  • November 28, 2016
  • Jamie LaReau
  • Automotive News

Look for deep-pocketed buyers to snatch up more dealership groups over the next 12 months and for foreign investors and outsiders to scope out the U.S. auto retailer landscape.

Those are two trends buy-sell experts noted in quarterly reports released last week.

In the first nine months, there were 172 transactions compared with 184 in the year-earlier period, Erin Kerrigan, managing director of buy-sell advisory firm Kerrigan Advisors in Irvine, Calif., wrote in her company's third-quarter Blue Sky Report, citing data from The Banks Report.

The publicly held auto retailers reduced their acquisition spending by 18 percent to $572 million in the first nine months, opting to shift money instead to stock buybacks, Kerrigan said. Private dealerships acquired 274 franchises compared with the publics' 52 in the first nine months, her report said.

Meanwhile, the number of transactions for dealership groups, as opposed to single-store purchases, continued to rise. There were 49 multidealership deals completed in the first nine months vs. 37 a year earlier, Kerrigan said.

Kerrigan said this trend will continue through 2017 because it's largely seller-driven.

"The families that own these groups are highly aware of the buy-sell market and that today's market enables them to sell their whole group in a single transaction," Kerrigan said. 

When markets shift even slightly, "There's a sense of "If we're going to do this, we have to do it now,'" she said. "You're only able to do these mega-transactions in the markets like we have today." 

Buy-sell adviser Alan Haig added: "It's easier now -- if you have a group of stores -- to exit than it was 10 years ago. Then, there were only a couple stores that could buy you out. Now there are many groups." 

Haig, president of Haig Partners in Fort Lauderdale, Fla., and author of the third-quarter Haig Report, said that while there were more dealership groups sold, the number of stores per group declined. Still, like Kerrigan, he expects the trend to continue through next year because so many buyers have deep pockets. The only thing that could derail it, he said, would be a recession. 

In the past three to six months, Kerrigan has been "in dialogue with three significant foreign investors looking to invest in the U.S.," she said. 

She has had inquiries from South American investors. She said overseas investors like dealerships' secure business model and strong U.S. franchise laws.

Haig: Buyers have deep pockets.

"Our franchises tend to be highly valued because there's a lot of protection for them," Kerrigan said. "When we see sales plateau, dealers remain profitable because the strongest driver of their profits is fixed operations, which doesn't go away." Dealerships also are protected by franchise laws. "So it's highly attractive to foreign investors." 

The investors are mostly dealership groups in other countries looking to acquire a dealership group that is a "sizable platform" of $500 million in annual revenue or more, she said. "They need a platform, they need existing management," Kerrigan said. 

But Haig said he views foreign investment interest as lukewarm. He pointed to the August 2015 purchase of Mill Valley Imports, which included three BMW stores in the San Francisco Bay area, by Japanese trading house Sojitz Corp. Sojitz has not acquired any dealerships since, Haig said. 

"There have been some investments by foreign buyers, but it's a minority in terms of overall deal transactions," Haig said. 

Haig said he sees more interest coming out of family offices and private equity firms. 

Haig's firm gets "some calls" from European and South American investors, but the dollar's strength on currency markets makes it hard for them to buy. 

Kerrigan agreed the purchase price in U.S. dollars is significant, but she said these investors have the capital and desire to buy U.S. dealership groups. She said it's realistic that at least one of them will complete a transaction in 2017 as prices moderate with more dealership groups for sale. 

"These investors are already in retail and know the manufacturers at a global level," Kerrigan said. "They're not a family office saying, "Let's get into auto retail.' I think they will get manufacturer approval without a problem."

 

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