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Buy-sell market poised to rebound, advisers say

  • March 26, 2018
  • Jamie LeReau
  • Automotive News

In separate reports, dealership buy-sell advisers Erin Kerrigan and Alan Haig predict their business will pick up in 2018, after two years of fewer transactions, because of the benefits from federal tax-law changes, dealers' desire to grow in scale and stable dealership profits.

"We see more public groups getting back into the acquisition game," said Kerrigan, managing director of Kerrigan Advisors in Irvine, Calif. "We continue to have family offices and high-net-worth investors looking to back growing dealership groups, so there's capital for those dealers who want to grow."

Many buyers and sellers believe the only way to survive as the industry embraces electric and selfdriving vehicles, ride-hailing and subscription car services, is to grow. If a dealer cannot expand fast enough, that dealer may choose to sell while prices are still healthy, Kerrigan said. Meanwhile, "There is a sense of urgency for some buyers to become $1 billion-plus dealership groups," she said.


The late-December changes to the U.S. tax code will ripple through the buy-sell market, predicted Haig, president of Haig Partners in Fort Lauderdale, Fla. "Tax reform really helps the publics the most because it reduced their tax rate, so they'll have a significant amount of capital they can use to acquire stores," said Haig.

There were 202 buy-sell transactions in 2017, Kerrigan wrote in her fourth-quarter Blue Sky Report, citing data from the Banks Report and Kerrigan Advisors Analysis. That's down 8.6 percent from 2016, and down a sharp 16 percent from 2015.

Haig wrote in his year-end Haig Report that the fourth quarter closed strong, with 97 stores changing hands. That includes 26 from New York asset-management concern GPB Capital's acquisition of Prime Motor Group in Boston. The 97 total compares with 78 stores a year earlier.

Excluding the GPB deal, though, the quarter would have been down 10 percent, making it two consecutive years of decline in sales of dealerships, he said.

In general, M&A tracks U.S. light-vehicle sales, Haig told Automotive News. Those sales peaked in 2015 and 2016, edging lower in 2017. So the pace of buy-sells "is consistent with what we expect."

But this year, said Haig, the new, lower corporate tax rates will boost buy-sell activity in several ways. The changes will give prospective buyers the cash to snap up more stores. They also will help dealerships preserve profits, offsetting any decline in new-vehicle sales and supporting dealership valuations at a time when, without the tax changes, price tags might be falling.

"Which party is going to enjoy the bulk of the benefit of the lower taxes? It's not clear yet," said Haig. "They may split it."

Haig and Kerrigan expect pricing to remain stable. That's because even though dealership profits have shrunk, the multiples by which values are measured have remained steady across brands.

Still, dealers have plenty of reasons to sell this year, Kerrigan said. Some are increasingly worried about the next generation's ability to manage and retain the business in a dramatically changing retail world, she said.

Also, a number of last year's sellers cited concern over their reliance on manufacturer incentives to support dealership profitability, she said. Kerrigan cites data from the National Automobile Dealers Association that shows the average dealership operating profit had held steady around the $435,000 to $472,000 range between 2011 to 2015, then dropped to $275,000 in 2016 and $91,774 last year, even though average earnings remained flat at around $1.4 million. She interprets the data as indicating how much a dealership's profits have become dependent on incentives paid by automakers for hitting sales targets and meeting other requirements.

"It's driving more dealers to sell because they are saying, 'I'm exposed to the whims of the manufacturer for my profitability,' " said Kerrigan.

But that fact has not turned away buyers who want to expand their footprint believing that "size and scale are going to be key to success in the future," she said.

Kerrigan believes the number of buy-sell transactions this year will exceed those of 2016 and could come close to the 240 in 2015, largely because of the public retailers getting back in the game.

In 2016, the publics spent about $650 million on acquisitions in the U.S., Haig said. Last year, that jumped to about $1 billion. He expects the group to spend in that same range this year.

But, he warned, "We are seeing that if they are not getting good return on capital, they are going to sell their stores," pointing to several sales of Nissan dealerships by AutoNation Inc.

He added: "We still see plenty of demand out there and more people willing to come to market to sell their business."




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