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$4 billion deal? A win all around, experts say

  • October 06, 2014
  • Jamie LaReau
  • Automotive News

More than $4 billion.

That’s how much experts in dealership buy-sells estimate Warren Buffett’s Berkshire Hathaway Inc. paid for Van Tuyl Group.

And they generally agree that it was a good price for both sides.

Terms weren’t disclosed, and Larry Van Tuyl, CEO of the family business, declined to discuss the deal’s financials or comment on any speculated figures.

But he said it was an all-cash deal that included all automotive real estate, but only the other parts of Van Tuyl’s holdings that were automotive-related. For example, it did not include a Van Tuyl technology company, Century, which serves the automotive and other industries.

Last year, Van Tuyl Group’s revenue was $8 billion. That’s expected to rise to $9 billion this year.

Mark Johnson, president of MD Johnson Inc. in Seattle, which advises dealers in buy-sell deals, estimated Van Tuyl’s pretax earnings at about $350 million, and the blue-sky part of the deal at $2.6 billion to $2.8 billion, about eight times earnings. Blue sky is the intangible value of a dealership.

Johnson said he was familiar with Van Tuyl’s financials because he worked with a buyer who made overtures to Van Tuyl earlier this year. Based on his calculations, Johnson estimated the total sales price at about $4.5 billion, including real estate and other assets.

Alan Haig, president of Haig Partners, a dealership brokerage company in Fort Lauderdale, Fla., said there are some unknowns to consider when estimating the deal. For example, assuming Van Tuyl’s finance and insurance company was included, what’s its value?

Haig crunched two sets of calculations, factoring for the various unknowns and estimating the blue-sky value at $2.6 billion to $3.3 billion. He put pretax earnings at $429 million to $471 million. As a result, Haig estimated Buffett paid $4 billion to $4.8 billion. None of his math factored in any debt, he said.

Based on his estimated ranges for Van Tuyl’s price tag and earnings, Haig said the group’s price-to-earnings ratio — price divided by net income — would be 20 to 27 percent lower than the average p-e ratios for the listed stocks of the top three public dealership groups: AutoNation, Penske Automotive and Group 1 Automotive.“So if you’re Warren Buffett, you might say to yourself, ‘I’m getting this at a discount,’” Haig said.

“This is where the win-win comes in.  I estimate that Larry would be willing to sell his business at seven times earnings plus assets, which would be a premium price.  But at this value, Warren Buffett may think he is getting a good deal since the public companies are trading at even higher multiples.  So he would be getting one of the best run auto groups in the world at an attractive price.”

Larry Van Tuyl called the deal “fair” for both sides. “He paid us a fair price, and I believe that it’s a great deal long term for the business,” Van Tuyl told Automotive News. “And because I’m going to be around for a while, I’m concerned about those aspects, too.”

Indeed, the value of time can’t be ignored, experts say.

“The thing you can’t put a price tag on is that it can take 30 years to acquire that many stores,” Johnson said. “In that respect, it was a great deal for Berkshire Hathaway. He skipped two decades of work to put together a group.”

There’s also the Buffett effect to consider.

“To be connected to Warren Buffett must give Larry some sense of pride and accomplishment,” Haig said.

“That’s a crown at the end of an illustrious career.”

Buy-sell advisers also agree Van Tuyl sold at the right time.

“He played his cards in a very impressive way to key it up for a transaction just like this,” Haig said.

“He had the right stores, the right management and the right markets. And then the timing: He sold when dealership values were at their all-time high.”

Some speculate that dealership values could continue to increase. But even if they do, Haig said, Van Tuyl shouldn’t have seller’s remorse: “You have to leave a little chicken on the bone for the buyer.”

Amy Wilson contributed to this report. 

You can reach Jamie LaReau at jlareau@crain.com. -- Follow Jamie on Twitter



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