- Apr 13 2015
- Christina Rogers
- Wall Street Journal
In 2007, as the U.S. auto industry was about to hit the skids, Georgia dealers Brian Logun and Frank Jackson made a gamble on an Atlanta Ford dealership that would pay off big.
Mr. Logun said the duo essentially snapped up the dealer by investing operating capital in it. In December, Messrs. Logun and Jackson sold the dealership then generating $110 million in annual sales for about $40 million to Asbury Automotive Group, a publicly-traded Georgia chain with 83 stores.
Their sale is one of many by small independent dealers looking to cash out amid the recent boom in the U.S. auto sales. Last year, 324 stores changed hands in the U.S., up 60% compared with 2013, said Cliff Banks, founder of the dealership news provider The Banks Report.
Mr. Banks estimates more than 130 stores changed hands in the first quarter of 2015, most of which were part of Berkshire Hathaway Inc.’s March purchase of the 81-store Van Tuyl Group.
With interest rates low, dealer profits at record highs and the pool of deep-pocketed buyers widening, the flow of deals is expected to continue this year and further consolidate the highly fragmented car retailing business.
The current seller-friendly environment contrasts with the situation just a few years ago, when many dealers faced a tightening credit market and an economic crisis that weighed on consumer confidence, bringing acquisition activity to a grinding halt. As part of its 2009 bankruptcy, General Motors paid $587 million to shutter 1,303 dealerships, or $451,000 a store.
As the industry roared back, dealer margins quickly rebounded and consolidation marched on. Since 2009, the number of retail outlets in the U.S. has fallen 13% to 17,875.
“When the market turned back on, it really turned on for surviving dealers,” said Erin Kerrigan, founder of Kerrigan Advisors, an advisory firm for dealers. “Auto retailers have had an incredible resurgence in success and that is the biggest contributor to the buy-sell party we see today.”
The last wave of consolidation among car retailers was in the 1990s when many of the publicly traded dealership groups formed. Even with the rise in dealership mergers and acquisitions, the industry remains highly fragmented with public groups controlling only about 8% of total revenue.
Car makers have also been known to hold up deals. As part of their dealer contracts, they have the right to refuse a sale and instead offer the franchise to their own buyer, experts said.
Automotive News, an industry trade paper, estimates the combination of dealer property values and so-called blue-sky multiples has increased 82% since 2006—the last time industry sales were as high as they are now. Blue-sky multiples include goodwill and other intangible assets, such as customer lists.
Dealership values also have nearly doubled in the last decade, climbing to $36 million a store last year, according to Kerrigan Advisors.
“It’s an easy business right now,” said Mr. Logun, 51 years old, who no longer owns any stores. “But as good as it is now, it’s going to be just as bad in three or four years. The thought of being able to walk away with enough money to live the rest of my life was very appealing.”
The rich prices also appeal to owners who have had their businesses for decades.
John Schenden last spring decided it was time to sell his Denver-area Fiat Chrysler store after 21 years in the car-retailing business. “I’d just turned 71 and I realized I didn’t have the stamina I had 10 years earlier.”
He immediately attracted four potential buyers, and sold the store for an undisclosed sum to Larry H. Miller Dealerships, which has 55 stores in seven states and is in the top 10 in the U.S. by number of stores.
Many independent retailers are looking to sell to larger chains because the business is changing, requiring them to revamp their stores and invest in technology to aid Internet sales. The shift is spurring a new and accelerated wave of consolidation in an industry long ruled by a patchwork of family-run businesses, many with deep ties to their communities.
“There are dealers who have been doing business one way for a very long time,” said Steve Starks, vice president for mergers and acquisitions at Larry H. Miller. “They’re looking at how people buy cars today, and rather than making wholesale changes, they decide to move on.” His company has been averaging about three to seven acquisitions a year, a pace it hopes to continue.
Among last year’s bigger acquisitions was Lithia Motors Inc.’s $600 million purchase of the DCH Auto Group, one of the largest in recent history. The publicly traded Lithia now owns 129 stores nationwide with plans to further expand.
The car-retailing business is drawing interest from outside investors, too. Billionaire Warren Buffett last year agreed to buy the Van Tuyl Group, the nation’s largest privately-owned dealership chain. His Berkshire Hathaway Automotive is pursuing more deals, and bought a Honda store in March from the store-founder’s grandchildren.
Investor George Soros also has representatives chasing potential deals, looking to either buy a large dealership group or take a minority position in one, people familiar with the situation have said.
“If [buyers] can meet the [car maker’s] requirements, they provide an exit strategy to some of these large groups looking to sell,” said Alan Haig, president of Haig Partners, another dealership advisory firm that worked on Mr. Logun’s sale of the Atlanta dealership.
Mr. Haig doesn’t expect acquisition activity to slow soon. “This year is going to be every bit as good as last as year in terms of the value and volume done,” he said.