With M&A picking up, private groups slug it out with the publics
Dealership buyers are on the prowl. 
As dealership buy-sells heat up, large privately held dealership groups -- sitting on hefty profits and with ready access to financing -- are bidding aggressively against the large public groups, even for the largest deals.
"They have access to a lot of cash, and they're interested in growing through acquisition," says Alan Haig, head of automotive services for Presidio Group. "In the past, sellers of these businesses just assumed that if I want the cash, I have to go to one of the publics, but that is not the case."
The publics aren't backing down. They're still in the hunt. Indeed, through June, public auto-retail companies spent $133 million on U.S. dealership acquisitions, up 8 percent from the year-earlier period, according to a semiannual report from Presidio, a San Francisco financial services company that brokers dealership sales. Counting international deals, public companies' spending on acquisitions rose 17 percent in the first half to $381 million, the report says.
"If this pace continues, the public retailers are on track to return to 2007 spending levels, albeit with a much heavier weight toward international acquisitions," the report says.
Reliable pricing data for private dealership groups' acquisitions aren't available. But Presidio is working on a couple of deals with private buyers in the $50 million to $60 million range. Haig says he also has had conversations with at least 10 private dealers in the past month who are interested in spending $100 million or more, whether for a single store or a group of stores.
Ron Sompels, partner in charge of accounting firm Crowe Horwath's retail dealer group, says dealers and dealership groups have enjoyed very profitable years and are overwhelmingly positive that industry sales will continue to grow, providing good returns in the next few years. "Many of these dealers have been able to amass some war chests" for buying stores, he says.
Sompels, who is based in Tampa, Fla., specializes in due diligence on deal transactions. The firm has about 600 dealer clients across the country, most of them large privately owned groups. His firm is the busiest it has been on deals "since before the recession," he says. The number of big transactions also is increasing. Sompels is seeing purchases in the $100 million-plus range by private buyers, though that's not the typical transaction size.
'Strategic fits'
Indeed, Sheldon Sandler, founder of Bel Air Partners in Hopewell, N.J., says what he sees as today's norm is private dealers or dealership groups snapping up small individual dealerships with annual profits of $10 million or less.
"The deals we've done this year have been larger, well-capitalized dealership groups buying individual dealerships," Sandler says. "There's a tremendous desire to find strategic fits" to fill out a group's portfolio, say, by adding a brand.
Or brands. Todd Blue decided in 2012 to expand his 2-year-old, two-store IndiGO Auto Group. When Desert European Motorcars, a nine-franchise luxury-brand auto complex in Rancho Mirage, Calif., became available, Blue didn't back away from the size of the deal. He was advised by Presidio and used traditional bank financing.
"We weren't necessarily looking for something with this many," Blue told Automotive News after closing the deal in mid-August. "But when we were presented the opportunity, it was hard to pass up. To have these nine brands on 10 acres in California is an entirely unduplicated opportunity." The Desert group sells Porsche, Audi, Jaguar, Land Rover, Rolls-Royce, Bentley, Aston Martin, Lotus and Maserati franchises in four stores. They join Blue's existing Porsche and Lamborghini dealerships in Houston.
Citing confidentiality agreements, Blue wouldn't disclose the price of his acquisition. But it's a sizable deal, putting IndiGO into an expanding group of privately owned dealership groups doing more and bigger deals.
Joe Aboyoun, a Pine Brook, N.J., lawyer who handles dealership sales, says he's seeing an increase in acquisitions by large private dealership groups in his territory of New Jersey, New York, Pennsylvania and Connecticut. The public groups aren't very active in that region, he notes.
'Go pretty far'
"When a private group wants a deal, they'll go pretty far to get it," Aboyoun says. "The buyers are looking to be as flexible as possible to get the deal before their competition."
Sometimes that means paying more or being more creative on how the deal is structured -- using higher rent factors, for example -- to satisfy the seller's requirements, he says. He's seeing a lot of deals in the $50 million range and blue-sky multiples that reach seven to eight times adjusted pretax earnings for some luxury-brand stores.
And their pockets are deep. "A lot of them don't even need financing," Aboyoun says. "They have their own capital. But if they do need it, they get it very readily."
Blue sky is the intangible value of a dealership, including goodwill and items such as customer lists and marketing materials.
Tim Lamb, president of a dealership brokerage firm, Tim Lamb Group, in Columbus, Ohio, says most banks are loaning at a minimum of 50 percent on blue-sky value. That means if a dealership is valued at $10 million in blue sky, a bank would loan at least $5 million on that portion of the deal. Some banks are loaning up to 85 percent, and "that's pretty strong," Lamb says.
"They are way more aggressive than I've seen them," he says. "They see it as a good investment, and banks need to put their capital to work, too." Sandler says many private dealerships have formed partnerships with financiers from Wall Street.
"That's a really big thing that's happening right now," he says. "That's all I do now is work on Wall Street and [with] international players coming in. They are coming in understanding they need exposure to U.S. auto retailing, but they need a strong partner."
Sandler says the arrangement typically will satisfy the manufacturer, and it gives the dealer the ability to buy bigger dealerships than he could afford in the past.
"I'm working with entities that have $9 billion to $10 billion to invest, which is more than the publics have to invest," he says. "The Wall Street multibillion-dollar financers are looking for more diversified investments away from the stock market."
Sandler says the investors want more "mundane, predictable, cash-flow type of businesses, meaning automotive retailing."
All looking
All six of the publicly owned franchised dealership groups say they continue to look for acquisitions. AutoNation Inc. COO Michael Maroone told Automotive News last month that the company is having a "flurry of discussions" on possible store purchases. "We're looking for major brand representation in each of our existing markets," Maroone said. "That's both domestic, Asian and premium luxury." The Fort Lauderdale, Fla., company is talking to between five and 10 potential sellers at any one time. "The number of discussions we're having is certainly much higher than it was two years ago," Maroone said. Asbury Automotive Group Inc., of suburban Atlanta, said late last year it aimed to acquire stores representing $400 million to $600 million of additional annual revenue through 2015. Purchases in December and July added an estimated $175 million. Asbury CEO Craig Monaghan told Automotive News last month that the company continues to look for big deals and would consider expanding its operations to areas such as Tennessee, Kentucky, Alabama and south Florida. "There is a very large footprint we'd consider our happy hunting grounds," he said. Lithia Motors Inc. has about $240 million available to use toward acquisitions, says CEO Bryan DeBoer, and is willing to adapt to sellers' demands. "If they want a partnership or an exit strategy over the next two to four years, we'll do partnerships," DeBoer says. "About five or six years ago, we basically just wanted to buy your store and preferred that management or dealers left." Group 1 Automotive Inc. of Houston has $100 million in cash and $250 million in credit lines to spend on acquisitions and is most interested in Southern California and the East Coast in the United States, says CEO Earl Hesterberg. The large private groups have always been in the market, Hesterberg says. What's changed, he says, is that smaller private groups "are more active as we've come out of the recession." Sonic Automotive Inc., of Charlotte, N.C., also aims to add stores in markets where it already operates. Sonic's annual report says its acquisition strategy "is focused on large metropolitan markets, predominantly in the Southeast, Southwest, Midwest and California." Tony Pordon, executive vice president of investor relations and corporate development at Penske Automotive Group Inc. of suburban Detroit, says the company remains "opportunistic" in looking for acquisitions, but "we would tend to shy away from or stay out of anything that would be a bidding war." He adds: "We would like to sit down across the table from somebody, negotiate with them, talk about what we can do with that business and reach an agreement with them." Or as Group 1's Hesterberg puts it, he "fears" a bidding war and prefers to not engage in one because "we always lose a bidding war."
|
