BRK.A Berkshire Hathaway Inc

By Jeff Bennett 

U.S. car dealerships changed hands at an accelerated pace this year boosted by robust new-car demand, strong dealer profits and an increased focus on the business following Warren Buffett's purchase of a Phoenix-based chain.

A total of 456 dealerships have been acquired thus far in 2015, a 40% increase over the prior year, according to The Banks Report, which tracks merger and acquisitions in car retailing. The gains comes as industry analysts expect U.S. vehicle sales to reach 17.5 million this year and expand again next year.

The rosy outlook is a dramatic reversal from 2009, when thousands of dealerships were forced to close as Chrysler LLC, now owned by Fiat Chrysler Automobiles NV, and General Motors Co. filed for bankruptcy protection. Sales of new vehicles fell to 10.4 million that year, and many dealers' survival was in question.

Total dealerships in the U.S. has increased modestly to about 18,000 since the financial crisis and steady volume gains have stirred new interest in the business. "Warren Buffett and others have come to see dealerships as stable, slow predictable growth," Banks Report founder Cliff Banks said in an interview.

About 10% of the acquisitions this year were generated by large publicly-traded dealer groups, such as AutoNation Inc. The Fort Lauderdale, Fla.-based retailer bought more than 30 dealerships expected to generate $1.7 billion in revenue. "We will continue to seek acquisitions to leverage our scale," said Mike Jackson, chief executive officer.

Still, there was plenty of opportunity for smaller players. Mark McLarty, founder of McLarty Automotive Group in Little Rock, acquired 15 stores this year bringing the total number of stores he operates to 20. He has grown by snapping up stores from older retailers who hung on through economic crisis are using the rebound to call it quits while valuations are high.

"A lot of these guys who got through the recession now feel their showroom values have recovered and now is the time to sell rather than holding on and risk going through another downturn," Mr. McLarty said. "It's tough for the stand-alone, local dealership."

The dealer said capital requirements continue to increase while profit margins haven't expanded fast enough to keep up. "I think you are only going to see more consolidation in the future," Mr. McLarty said.

A trigger for the wider consolidation came in 2014, when Mr. Buffett's Berkshire Hathaway Corp. bought 75 stores from Arizona-based auto dealer Larry Van Tuyl.

Mr. Buffett said in March he would continue making such acquisitions over the next couple of years.

U.S. new-car buyers are expected to spend $437 billion on vehicles this year, a 7.3% increase over 2014.

Still, new-car price competition among dealers remains fierce and auto manufacturers continue to demand hefty new investments.

Mercedes-Benz USA, for example, is requiring its dealers to invest about $200,000 to expand their showrooms and create a special demonstration area if they want to sell the luxury auto maker's AMG sports models next year. Those dealers who don't expand risk falling to the end of the line when it comes to getting their vehicle orders fulfilled.

Used-car sales and finance operations often offset weaker profits in new-car departments and service bays, say industry executives.

Despite such pressures, the value of the average dealership with at least three stores increased 10% from 2014 to about $40 million, according to Kerrigan Advisors, which helps dealers sell their businesses. The typical new-car dealer owns three stores and the real estate their franchises occupy.

Erin Kerrigan, founder of the Irvine, Calif.-based firm, expects a new record for dealership mergers and acquisitions in 2016 because of the large number of dealership groups expected to go on the block.

But she warns that "since car sales aren't going to grow much more than where they are at today, there is little doubt in my mind that we are at peak and many [dealership] sellers are choosing to go to market."

Write to Jeff Bennett at jeff.bennett@wsj.com

(END) Dow Jones Newswires

December 21, 2015 19:54 ET (00:54 GMT)

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