By Christina Rogers
In 2007, as the U.S. auto industry was about the 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-based chain with 83 stores.
Their sale is one of many by small independent dealers looking
to cash out amid the recent boom in U.S. auto sales. Last year, 324
stores changed hands in the U.S., up 60% compared with 2013, said
Cliff Banks, founder of 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 the
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 the 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 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
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 year in terms of the
value and volume done," he said.
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