515 East Las Olas Blvd, Suite 860, Fort Lauderdale FL 33301| Email Us | 954.646.8921


US auto dealerships to see increasing PE interest on the back of rising profits

  • April 14, 2015
  • Kristen Schultheiss
  • Proprietary Intelligence

For opportunities in the US auto retail space, strategics are expected to see increasing competition from private equity firms and family office-backed groups who are looking to cash in on the sector's rising profitability, industry sources told this news service.

The paradigm shift away from a fragmented space consisting primarily of family-owned businesses to an increasingly consolidating one is perhaps best represented by Warren Buffett’s purchase of Texas-based Van Tuyl Group in October 2014. The deal was concluded through Buffett's Berkshire Hathaway (NYSE:BRK-A).

For a longer period, dating back to before 2010, the Bill Gates Foundation has owned a significant stake in the US' largest auto retailer, AutoNation (NYSE:AN). The foundation reported a 15% stake in the Fort Lauderdale, Florida-based company as of January 2015.

The cache of Buffett and Bill Gates “legitimizes” the marketplace and brings another level of competitiveness to the space, said Mario Murgado, CEO of Florida-based Brickell Motors, a privately held company that generates north of USD 200m in revenue.

“Berkshire publicity has created a lot of buzz and has created more opportunities and energy around M&A work,” said Timothy York, managing partner of advisory group DHG Dealerships. “If Warren Buffett is going to get in, it is probably going to get more people to say ‘what is this industry about?’”

And with public companies accounting for less than 10% of the 17,000 franchise dealerships in the US, the industry is still highly fragmented, with substantial opportunity for consolidation, said Rick Ford, CEO of dealership group RFJ Auto Partners.

New York City-based PE firm The Jordan Company created RFJ Auto Partners in July 2014, in partnership with industry veteran Rick Ford, who is group CEO.

RFJ Auto Partners expects revenue to reach USD 1.4bn in 2015. Ford declined to disclose long-term goals in terms of revenue or EBITDA for RFJ, but mentioned the company has plans to “grow significantly”.

York said his firm has been involved with a number of family offices and PE groups which considered getting into the auto dealer space well before the Van Tuyl announcement. However, he said he expects the Berkshire Hathaway acquisition to engender more private investment in the space.

In the auto dealership industry, there are a lot of reasons why companies look to sell, Ford said. “Dealers don’t reach a size and then try to sell. They will typically hold onto assets until they are ready to retire or for financial planning purposes and want to monetize.”

In the past, automotive manufacturers have played a role in keeping PE out of the space as they veered away from PE groups in favor of investors committed for longer terms, Ford said.

Honda and Toyota want dealerships to be owned by dealers with a long-term perspective. They don’t really like the idea of a PE firm that has a five-year investor horizon. It creates disruption,” said Alan Haig, president of dealership brokerage firm Haig Partners.

However, PE firms and family offices have been able to acquire dealerships as long as the chief executives and general managers of locations remain leaders of the investor-owned stores and have significant experience in running a dealership.

At least with family offices, Haig said, future generations will take over the business and will own the assets in the long term.

As for why these institutional investors want to get into the auto retail industry, the industry sources said dealerships are more profitable than they used to be. Furthermore, they are outpacing the profitability of other investments.

“They’re chasing yield,” Haig said. “If you compare returns by acquiring a car dealership compared to buying stocks and bonds, investing in a car dealership is a much better investment right now.”

Yet, institutions with minimal experience in the automotive retail world can face troubles when stepping into the space.

“There are challenges with respect to finding good people to run a dealership,” York said. “All these PE groups and family offices don’t have that dealership talent. A lot of these people understand capital, but to be able to find reputable people who can be approved by a manufacturer is a challenge.”

Four years ago, York’s firm did not have a recruiting business, but it now has four employees who recruit leaders for dealerships full-time.

According to Haig, big players are seeking targets with up to USD 50m in profits and are looking to make them even larger. “We have a client looking to invest a minimum USD 200m in a company,” he said.

Although average multiples in the space are periodically released by advisory firms, true valuations are difficult to pinpoint as dealership values vary widely based on auto franchise, location, state of operations, and what the buyer can do with the dealership, Murgado said.

Family office and PE investments often boost dealership value and make it even easier for large groups to sell, the sources noted.

“Institutions will buy a minority or majority stake which brings a new opportunity for ownerships. They can sell some of their company but continue to operate their businesses. This didn’t exist a year ago,” Haig said.

Larry H. Miller Dealerships was once a family-owned group that has grown to about 55 stores. It recently replaced Greg Miller with a CEO from outside the family, and now the Millers are investors and not the operator, Haig noted.



What Can We Do For You?