March 6, 2018 — Despite industry perception that dealership consolidation is on the rise, buy-sell activity of U.S.-based stores declined in 2017 for the second consecutive year, based on data compiled by The Banks Report.
Even with the downward trend the last two years, the buy-sell market has been vibrant since 2013 as the industry came out of the recession. Between January 2013 and December 2017, approximately 9.1% of the 18,200 U.S.-based dealerships were involved in buy-sell transactions, according to The Banks Report’s fifth annual report on dealership buy-sell activity. TBR’s research shows there were 995 transactions involving 1,669 rooftops over the five-year span.
This report will recap 2017 with an analysis of the numbers, a discussion of the notable deals of the year and an analysis of the buy-sell activity of the public dealer groups. The report will conclude with TBR’s projection for 2018.
TBR does not provide perspective regarding blue sky values or brand multiples. Kerrigan Advisors and Haig Partners (buy-sell advisory and brokerage firms) each publish quarterly reports (which rely on TBR’s buy-sell data) that provide helpful analysis of industry blue sky trends. TBR does not have access to financial data from each transaction. Also, it is our perspective that each buy-sell is its own book, driven by numerous factors that extend beyond a brand’s perceived strength or lack thereof.
BY THE NUMBERS
Although numerous media outlets predicted 2017 would be a record-breaking year for transactions, the year started slow with the number of dealerships changing hands down 45 from the first quarter 2016. Overall, 332 U.S. dealerships were sold, down from 359 in 2016. The number of transactions also declined to 204 from 219 over the same period.
March was particularly brutal with only 10 transactions accounting for 11 stores for the month down from 55 in 2016. The deals also were smaller in the first quarter with 44 out of the 57 transactions involving only one dealership.
Activity, however, picked up the rest of the year and was more in line with 2016 as large transactions the second half of the year from Lithia Motors and GPB Capital carried much of the increasing momentum.
In our buy-sell report in early 2017, TBR countered the projections made by others of a record breaking year, and instead correctly predicted the year’s activity would be consistent with previous years.
The data, though, demands context. Instead of trying to build a trend from the data over a year or two, we see 2017 as being the tail end of a five-year period where competing dynamics drove the buy-sell market.
Let’s call it the “Recovery Years.” In 2013, the industry was just coming out of the recession from the previous five years and began getting the attention of Wall Street and private equity firms. Meanwhile, public dealer groups had proven their ability to survive in the midst of a catastrophic downturn. More importantly, automotive sales skyrocketed.
In the fall of 2014 — on the same day Lithia Motors closed on its purchase of the 27-store DCH group — Warren Buffett on CNBC’s morning Squawk Box announced the $4.1 billion acquisition of the Van Tuyl dealer group. He boldly proclaimed the new group would be bigger than the 260-store AutoNation within a couple of years.
There were others. Rick Ford had already began building his $1 billion plus empire with the Jordan Company while GPB Capital was just getting started. In early 2015, George Soros was one of three high profile investors partnering with Mark McLarty in his new venture. And the Bechtel family’s investment arm, the Fremont Group, picked up the Morrie’s dealer group in Minnesota.
By the fourth quarter of 2015, all signs pointed to a record-breaking era of dealership buy-sells. But the opposite happened. Dealer acquisition activity began to slow the next two years creating a moderate, but healthy, environment of activity. Over the five-year period, just over 9% of all dealerships were involved in a buy-sell.
So what are these competing dynamics driving and restraining buy-sell activity?
Forces pushing transactions:
- Downward pressure on margins are making the business more difficult and less fun.
- New technology becoming more complicated and costly is pushing less-capitalized dealers out.
- The last four or five years — especially with the creation of the CFPB, compliance issues became a driving concern, causing some dealers to look for an exit.
- Aging dealer body — this will continue to be a dynamic driving acquisitions.
- Still plenty of acquisition opportunities exist with more than 15,000 dealerships part of smaller groups.
- Manufacturers have become more open to outside investors having ownership.
- Uncertainty about the future of automotive — this hasn’t been a real issue yet, but will be over the next five years.
Forces restraining transactions:
- Dealer personality — still an entrepreneurial business and dealers like being the go-to business in town. Never underestimate the power of having your name on the building. It’s not rare to see a dealer who has sold get back in the game buying other stores.
- Buy-sell transactions are complicated. Real estate, family/partner issues, manufacturer challenges such as framework agreements governing how many stores of one brand a group can own or the dreaded Right of First Refusal often derail potential deals.
- Attractive brands are hard or costly to get.
- With all of the hype about private equity, Berkshire and others being on the hunt, potential sellers have rich expectations. The asking prices are too high for many buyers, who have indicated to TBR they’re content to sit on the sidelines until prices come down.
- Large groups are nearly impossible to acquire. In the last 10 years, only three groups of 25 or more stores have been sold — Van Tuyl, DCH and Prime Motors (which switched investment firms — Abrams Capital last year sold its interest to GPB Capital).
- In the last two years, most of the public dealer groups — not Lithia — have dialed back their acquisition activity. (See our discussion below about the buy-sell practices of the public dealer groups).
- Uncertainty surrounding national politics have also kept a few buyers and sellers on the sidelines. First, it was the presidential election in 2016 and the uncertainty of the winner’s impact on the auto industry. Then, the uncertainty coming from the Trump administration and whether tax legislation would be passed likely pushed the completion of several deals into this year.
The Annual Lists (Each list is compiled in a downloadable Excel spreadsheet)
The Banks Report does not claim to have every single transaction. Occasionally, there are deals that are kept private that we don’t have any information about. We also don’t include deals in which an investor may make a minimum investment in a store or group.
However, the data compiled by TBR is the most comprehensive in the industry and provides an accurate window into what is happening at the buy-sell level. TBR compiles the the data from SEC filings, media reports, company press releases, websites and a wide network of relationships developed through the years.
Also, the lists do not include financial data. Most of the transactions are private, which makes the financial details unavailable.
2017 (To see a list of Buy-Sells for 2017, Click: (TBR_Jan_Dec_2017_Dealership_Acquisitions)
- 175 Different Buyers
- 332 Dealerships Acquired (Does not include international dealerships acquired by U.S.-based companies)
- 204 Transactions (U.S. only) Note: 150 of the transactions (74%) were for single-point stores, consistent with 2016.
2016 (To see a list of Buy-Sells for 2016, Click: 2016_Dealer_Buy_Sell_TBR_Jan_Dec)
- 190 Different Buyers
- 354 Dealerships Acquired (Does not including 29 international stores acquired by U.S.-based companies)
- 219 Transactions (U.S. only)
2015 (To see a list of Buy-Sells for 2015, Click: Dealership_Buy_Sell_15_TBR)
- 199 Different Buyers
- 479 Dealerships Acquired (Does not include international dealerships acquired by U.S.-based companies)
- 239 Transactions (U.S. only)
2014 (To see a list of Buy-Sells for 2014, Click: Dealership_Buy_Sell_14_TBR)
- 171 Different Buyers
- 324 Dealerships Acquired (Does not include international dealerships acquired by U.S.-based companies)
- 217 Transactions (U.S. only)
2013 (To see a list of Buy-Sells for 2013, Click: Dealership_Buy_Sell_13_TBR)
- 96 Different Buyers
- 180 Dealerships Acquired (Does not include 22 international dealerships acquired by U.S.-based groups)
- 116 Transactions (U.S. only)
NOTABLE ACQUISITIONS FROM 2017
- GPB Capital’s investment in Prime Motors: This was the largest deal of the year and tied for the second largest within the last 10 years. With the deal, GPB created the Capstone Automotive Group, which now has approximately 60 dealerships. GPB is the new big player in the space, with a war chest and ready to buy.
- GPB Capital’s acquisition of Kenny Ross: This was GPB’s first big deal of the year and creates a foothold in the midwest and Pittsburgh markets
- Lithia Motors acquisition of Downtown LA Motors: Lithia made a statement with this deal. Financially rumored to be one of the biggest (if not, the biggest) deal of the year, the purchase gives Lithia a significant presence in one of the U.S.’s primary markets.
- Lithia Motors Acquisition of Bairl: Lithia’s first entrance into the Pittsburgh market, followed up with its purchase of the Day Auto Group last month.
- Gettel’s acquisition of Palm Auto Mall: This deal flew under the radar, but picking up this eight-store group in January last year, grew Gettel’s empire to 20 stores in southwest and central Florida.
- Mike Maroone’s investment in four Colorado stores: The majority investment into the four stores owned by Joe Serra was Maroone’s reentry into auto retail following his departure from AutoNation. Maroone also reportedly invested in the three Roger Dean Chevrolet stores in south Florida.
- Warren Henry Automotive Group: The group picked up three Duncan Auto Sales stores — Ford, Toyota, Chrysler Dodge Jeep Ram — in Key West.
- Napleton Automotive Group: Ed Napleton continues to buy adding 11 stores last year in the Wisconsin, Indiana and Pennsylvania markets. A win in hotly contested court battle involving Right of First Refusal in Wyoming Valley, PA landed Napleton a BMW and Subaru store. But he lost out on picking up an Audi and Volkswagen store in the same deal. He now has 51 dealerships across seven states.
- Piazza Auto Group: Following three acquisitions last year, the Piazza’s have built a quiet empire in the Philadelphia market with 25 stores now.
- Blaise Alexander: The group picked up four stores from the Berger family in November.
- Trophy Auto Group: Nasser Watar’s Trophy Group picked up four stores from the distressed Sage group in the Los Angeles market. Keep an eye this group, which started in 2014 with the purchase of a Mercedes Benz dealership in Encino, CA. They seem intent on making numerous acquisitions in the near future. Watar has several interests in the Middle East including Nissan Gulf FZCO, regional Nissan & Infiniti Headquarters for the Bahrain and Kuwait distributorships, along with a third party insurance automotive insurance administration firm with offices in Europe, the Middle East and Southeast Asia.
- Betten-Baker Automotive Group: The group, located in west Michigan added five stores last year, taking its total owned to 13. It just added a 14th store, a Chrevolet dealership in Cadillac, MI in January.
- Del Grande Automotive: The northern California group picked up four of Ken Ross’ Team Superstores last May, bringing its total to 19 owned now.
Notes of interest from 2017
Pittsburgh has become the hot market in the last eight months with 32 dealerships changing hands there.
Nissan had a rough year in 2019 with some of its dealers.
- Gary Flom’s attempt to build an empire in New York (Stunning Downfall of a Manhattan Empire) which included the Nissan stores in Manhattan, White Plains and Mt. Kisco, came to a crashing halt. Flom is the second Nissan dealer to have problems in Manhattan. A bitter court battle resulted in the three Nissan stores and a Maserati store closing in an important market. Jonathan Sobel picked Flom’s the Jaguar Land Rover store in an auction last fall.
- Meanwhile, on the west coast, the Sage Automotive Group ran into problems with the Federal Trade Commission and had to pay a multi-million fine in March. Nasser Watar’s Trophy Automotive picked up four of the stores — including two Nissan stores — in the ensuing fallout.
- And finally, in the Cleveland, OH market, two Nissan stores — Streetsboro and Aiport — both owned by Automax, closed suddenly. Automax, a Florida-based company backed by a small private equity firm Aviate Capital in Naples, reopened the stores in November. Former owner Bernie Moreno reportedly has a team running the Airport Nissan store and is rumored to be buying it.
Berkshire Automotive ran into problems in Texas (Berkshire Bill Dead in Texas?) when regulators determined the group is in violation of state franchise law due Berkshire’s ownership of a RV manufacturer. The issue is working its way through the Texas administrative courts system. Despite the challenges, Berkshire was awarded open points in Texas last year by Mercedes Benz (being contested by Continental Motors in Austin) and Ford.
Berkshire has been quiet on the acquisition front since 2015. We expect that to change over the next several months. The parent company has $116 billion in capital that needs to be deployed. Adding another large group makes sense. But there are other automotive-related firms also, such as a numerous large used car retail companies; or even auction-related interests.
PUBLIC DEALER GROUP ACTIVITY
As a group, the six public dealer groups dialed back their acquisition activity in the U.S. last year from 39 to 23, the fewest buy-sells for the group since 2011 when they acquired 21 dealerships. The 23 rooftops accounted for 9.9% of all the dealerships involved in buy-sells last year.
From January 2008 to December 2017 — a 10 year period — the public dealer groups acquired 301 (12% of all buy-sells in that period) U.S.-based dealerships according to their SEC filings. Lithia Motors has accounted for a third of those acquisitions, including 18 of last year’s 23 buy-sells. This year’s activity should pick up as the public groups have already picked up 19 rooftops through the first two months of the year.
The Oregon-based group is on a tear, picking up 54 dealerships in a 26-month period — and 104 since January 2013. TBR last year predicted Lithia would make a strong move into Pennsylvania, which it has with the acquisition of two groups for a combined 16 stores in the last nine months. Overall, Lithia acquired 18 stores in 2017 and already has picked up 16 this year, which should add about $1.3 billion to Lithia’s annual revenue. With this year’s purchases, Lithia now is at 185 stores.
- The eight-store Baierl Auto Group in Pittsburgh
- The seven store Downtown LA Motors in southern California
- Crater Lake Ford and Mazda in Medford, OR
- The Armory Garage in Albany, NY.
- Ray Laks Honda and Ray Laks Acura in Buffalo, N.Y
- The eight store Day Automotive Group in Pittsburgh (Day earlier sold its Toyota dealership to the Ganley Automotive Group)
- Six stores from the New Jersey-based Prestige Auto Group — BMW, Mini, Mercedes, Toyota and two Lexus dealerships.
Outlook. Whether Lithia takes a breather to digest the recent acquisitions remains to be seen. For now, the group is highly opportunistic and sees a clear runway for adding stores. And Wall Street appears to like CEO Brian DeBoer’s strategy as its share price continues to remain above $100 (Although, now trading at $103 — below its 52-week high of $127.99. Look for it to bounce on the acquisitions last week).
Lithia maintains an entrepreneurial model with its stores, leaving management teams in place and providing them with decision-making responsibilities along with support.
Penske Automotive continues to take a measured approach to buy-sells picking up two stores last year — a Jaguar Land Rover store from the Prestige Automotive Group and Schumacher European (Mercedes Benz Sprinter) outside of Phoenix (the rumored $140 million price tag — included real estate — likely was the most ever paid for a single point store). From 2013 to 2017, Penske acquired only nine new-car dealerships in the U.S.
But, it has been active internationally adding 26 new-car stores in the U.K., Italy and Germany the last five years. The group also has purchased several heavy truck dealerships including a distributorship in Australia.
Penske also is building an independent used vehicle company adding the CarSense brand in Pennsylvania and CarShop in the U.K. in the first quarter of 2017. It recently acquired CarPeople in the U.K. also.
Meanwhile, Penske added a BMW/MINI store in the U.K. and an Audi/Volkswagen dealership in Germany in 2017.
Outlook. Expect more of the same from Penske — strategic acquisitions of profitable and high-traffic stores in strong markets along with additional purchases of independent stand alone used-vehicle super centers.
GROUP 1 AUTOMOTIVE
The Houston-based group added an Audi store in Dallas last year, its 23rd U.S.-based acquisition in the last five years (59 total in the last decade). The group has focused on international transactions adding 46 stores in the U.K. and Brazil since 2013 (including 12 in the U.K. last year). Earlier this month, Group added a Mercedes Benz store in the U.K.
Outlook. Look for Group 1 to be more aggressive this year. It’s already added two dealerships in the El Paso market and has indicated it is looking for more.
Still the leader with approximately 260 rooftops, AutoNation added one store last year — Alpine Jaguar in Fort Lauderdale. Despite last year’s pull back from buy-sells, AutoNation has picked up 52 dealerships in the previous five years and 68 in the previous 10.
Outlook. AutoNation will continue to be moderate to slow with acquisitions of new-car dealerships. The company embarked last year on a $500 million investment into diversifying its portfolio while building the AutoNation brand. The group added eight collision centers in 2017 (now has 76 with another 10 scheduled for 2018); six parts distribution centers with another two coming online this year; and will have five used-vehicle super centers operating by the end of the first quarter along with four of its own auctions.
AutoNation also has had an opportunistic and aggressive share buyback program in recent years, including the third quarter last year when it bought back $400 million worth of shares.
ASBURY AUTOMOTIVE. Asbury’s buy-sell strategy is quiet. The group has only picked up 16 dealerships in the last 10 years — one last year, Hare Chevrolet in Indiana. It added Terry Lee Honda earlier this year and executives have indicated it plans to be somewhat more aggressive as opportunities come up in the future.
Sonic has not acquired a store since 2014 and has picked up only 11 in the last 10 years. It has added several new points, but acquisitions have been silent. Part of the reason is that Sonic’s credit terms going back to the recession in 2009 limit how much it can spend on acquisitions.
Sonic instead is focusing on share buy-backs — a “better deal” because of where the company’s stock price is at ($18 – $26 a share), CEO Bryan Scott Smith told analysts on the recent earnings call. Sonic will probably grow the franchise-side of the business through open-points instead of with acquisitions.
Another factor is Sonic’s Echo Park brand, its used vehicle initiative. The group now has nine stores — will have 13 by the end of the year.
The group has added seven stand alone used car stores through acquisition in the last 18 months — six in Georgia and Florida and one in Dallas. They are being rolled into Sonic’s Echo Park brand, which has become the group’s main focus over the last year.
Jeff Dyke, executive vice president, said the group is focusing more on the pre-owned side because the barriers to entry are lower and the opportunities are greater. Furthermore, in contrasting the used car model to the franchise model, Dyke had harsh words on the call, saying, ” We’re just not going to get caught up in the game of building these facilities like we’ve been asked to build in the past. We’re just not going to make those investments unless the investment warrants it and we’re not going to be bullied into that situation either.”
A New Era
This year begins a new era in automotive retail. Whereas 2008 through 2012 were the “Recession Years,” and the most recent five were the “Recovery Years,” the next few years will be an era of uncertainty. And that dynamic will drive much of the buy-sell activity moving forward.
The industry is moving into a period where there will be more questions than answers. No one knows when and if autonomous vehicles become the norm and what the impact will be on the dealer model. Throw in digital retailing, vehicle subscriptions and the pending electric vehicle tsunami, there are serious questions about how the retail model will look like in the next several years.
This is the first time in the industry’s history that the future is so uncertain. That dynamic will begin to drive dealers to exit the business over the next few years.
What does that mean for the level of activity?
For one, it means more motivated sellers who will want to get out before mass “disruption” occurs. On the other side, there are numerous regional groups with cash and resources necessary to both invest in new technology and business models along with making acquisitions. These groups are becoming regional powerhouses, and in some cases, are branching out nationally.
Over the next five years, buy-sell transactions should occur at a brisk pace. Again, it’s hard to isolate activity trends to one year but more dealers will exit as business pressures continue to grow. The industry will see some big exits, similar to Van Tuyl and DCH a couple of years ago — although, there will be more of them. The challenge, though, is there are few buyers today in a position to pull off the big deals. At least two of the public dealer groups will be taken private (Asbury and Sonic are the most likely candidates). There will be others to take their place — such as GPB Capital.
For at least four years, TBR has been reporting on the entrance of private equity firms (mainly in the form of Family Offices) into auto retail. The expected blitz never happened, but a few notable players have entered the space since 2014.
- Berkshire Hathaway Automotive (85 dealerships)
- McLarty Automotive partnered with Soros Fund Management and the investment arms of the LaFrance and J.B. Hunt families (19 dealerships)
- Fremont Holdings (the family office of the Bechtel Group) acquired the 11-store Morrie’s Automotive Group in Minnesota in late 2015
- ZT Wealth, a group of investors led by Taseer Badar (six dealerships in Florida)
- RFJ Partners, led by Rick Ford and backed by private equity group the Jordan Company, (24 dealerships)
- GPB Capital (investments with several dealerships)
It’s not a new phenomenon, though. In the last twenty years, private equity has played a big role in automotive retail. In some of the more notable cases, Bill Gates and Eddie Lampert from Sears fame have been two of AutoNation’s biggest investors. Ripplewood Holdings and Freeman Spogli took Asbury public in 2002. Michael Dell has been one of Asbury’s largest investors for more than 10 years. And there was the short-lived California Superstores experiment in 2011 that garnered significant media attention when it began, but lasted less than five years.
Last year, we began hearing about the interest international firms have in buying dealerships in the U.S. The one significant deal last year was the European Pons Holdings investment into Todd Blue’s InDIGO dealer group. We’ll probably see another one or two this year — one likely from Canada.
Like private equity, foreign investment is not new to the industry. Marubeni and DCH (acquired by Lithia) are two that companies with foreign backers that have played a role. At least two automotive firms from Mexico began buying stores in California and Texas three years ago, but have since dialed backed their activity.
Nevertheless, based on last year’s chatter, the industry likely will see new and non-traditional firms enter the retail space over the next year or two. The question is whether it will be enough to become a trend or just a few deals here and there.
Buy-sell activity has been hot the first two months of 2018 with more than 40 deals completed already. January and February are typically big months, though. Last year began strong also with 72 rooftops changing hands the first two months, before cratering in March.
Meanwhile, the industry already has had two big deals from Lithia.
Other notable deals include the McLarty-backed RML Automotive group, which last week picked up three stores in northwest Arkansas from the Everett Automotive Group — Everett Chevrolet and Everett Chrysler Dodge Jeep Ram Fiat — both in Springdale; and Everett Buick GMC in Bentonville. Partnering with RML in the acquisition is Dallas Cowboy’s owner Jerry Jones’ Blue & Silver Ventures and JH Auto Holdings, a Hunt family firm led by J.B. Hunt Transport co-founder and philanthropist Johnelle Hunt — both long term partners with McLarty and Johnson
The group now has 28 new car dealerships across seven states. It was co-founded by Black Entertainment Television’s Robert Johnson, who is the group’s chairman, along with Thomas “Mack” McLarty. Former Toyota and Chrysler head Jim Press is the group’s president.
Terry Taylor’s AMSI is back in the game buying Toyota, Nissan and Mazda stores from Penske Automotive’s Royal Palm Auto Mall in Florida in January for a reported $44.7 million.
The White Automotive Group, acquired four dealerships from the Taylor group in Ohio Chevrolet, Buick, Nissan, Honda and Chrysler/Dodge/Jeep/Ram and now has 22 rooftops.
BUY-SELLS BY THE BRAND
Domestic brands accounted for 59% of the buy-sell activity in 2017 (down from 64% in 2016). Import non-luxury was 28% with Import luxury at 13%. (The Banks Report counts each franchise as a separate brand. For Example, Chrysler Dodge Jeep Ram are counted as four separate brands.)
The data has not changed much the last three years. Brands heavy with truck and SUV sales seem to be the most attractive based on buy-sell activity. Last year, though, is the first year since TBR began compiling the data that Ford franchises led in acquisitions. Chevrolet led last year (and came in a close second this year. The previous three years — 2013 through 2015 — Chrysler-related brands led in buy-sells but were down this year to under 30.
The desire for truck brands — as well as the fact that Ford, Chevrolet and Chrysler also have significantly more franchises than other brands — accounts for the higher buy-sell activity.
Mercedes Benz again led the luxury category with 13 buy-sells — up from 12 last year. Meanwhile, Nissan led the import brands with 21 buy-sells with Toyota coming in second with 18 and Honda third with 17.