July 9, 2020 — After a short COVID-19-induced respite in April and May, the dealership buy-sell market is back in business in a big way, finishing the first half on par with 2019 activity.

All signs point to a sizzling third quarter, continuing the pace set in June, which saw 22 transactions involving 31 rooftops.

The Numbers

According to data compiled by The Banks Report, the numbers for the first six months of 2020 mirror those of the first half of 2019 almost exactly, with the number of transactions up slightly from 96 to 101 and the total number of rooftops involved at 141.

The Banks Report has compiled dealer buy-sell data from January 2013. (See editor’s note at the end of this report).

Click Here to download a spreadsheet of 2020’s buy-sells from January to June.

From 2014 — when dealership acquisition activity began to pick up following the 2008-2009 recession — through 2019, the auto retail industry averaged 225 transactions per year involving 372 dealerships.

Buy-sell activity has been mostly consistent since 2014, with approximately 2% of the nation’s 18,200+ new car dealerships involved in transactions each year.

2nd Quarter – Difficult, but Better than Expected

W wrote on March 9 in our 2019 Buy-Sell Report that it was too soon to predict what impact COVID-19 would have on the buy-sell market. Ten days later, we were writing that COVID-19 had slammed the brakes on several transactions as buyers and sellers grappled with what the future of the auto industry and the overall economy would look like.

Car sales plunged over the last two weeks of March but slowly began to recover throughout April and into June, with sales down nearly 24% year-over-year.

Much of the decline is due to a drop in fleet sales to rental companies (with some OEMs reporting declines of 90% or higher) rather than retail sales.

Meanwhile, the expected devastation in used-vehicle wholesale values never materialized, allowing dealers to hold the line on retail pricing.

According to Cox Automotive’s Manheim data, wholesale prices are up 6.6% for the year, and retail prices are up 1.4% as used car sales at dealerships jumped 17% above JD Power and Associates’ pre-COVID projections.

Buyers Coming Back to the Table

The better-than-expected results brought buyers back to the table in June. Many of the deals that were shut down in March and April re-engaged toward the end of May and into June.

Lithia Motors informed shareholders in April that it was pushing back the 14 acquisitions it had under contract to the second half of the year. This week, the company announced it has restarted the acquisition process.

The group closed on the Chrysler, Dodge, Jeep, Ram, and Nissan stores owned by Smolich Motors in Bend, OR, in June, bringing its total to six acquisitions for the year. It also sold its DCH Toyota City in New Jersey in May.

Other notable deals in June include:

• Jeff Swickard’s acquisition of the Qvale’s Jaguar Land Rover store in San Francisco and its Redwood City Land Rover dealership. Swickard also acquired Magnussen Lexus and likely will close on another deal this month.
• Holman sold its Chevrolet store in Sacramento (part of the Kuni deal a few years ago) to JS Folsom Automotive. Holman picked up St. Louis Motorcars in March — Aston Martin, Bentley, Lamborghini, and Rolls-Royce.
• Southern United Automotive (Matt Bowers and Franklin McLarty) acquired Leah Salsbury’s Chrysler, Dodge, Jeep, and Ram store in Baton Rouge.
• Roger Hogan unloaded Claremont Toyota to the Wilson Automotive Group and San Juan Capistrano Toyota to the Oremor Group.
• Mark Wahlberg and Jay Feldman acquired Haydocy Buick GMC, adding the Chevrolet store they acquired a couple of years ago.
• Jerry Seiner purchased Henry Brown’s Chevrolet and Chrysler Dodge Jeep Ram stores in Arizona.

Asbury Automotive/Park Place Deal Back On

The Asbury Automotive Group announced this week it has restructured its deal with Ken Schnitzer’s Park Place stores after backing away in late March due to COVID-19.

In the revised deal, Asbury is getting eight dealerships representing 12 new vehicle franchises in the Dallas market. The brands include three Mercedes-Benz and three Sprinter stores, two Lexus dealerships, one Jaguar Land Rover store, one Porsche dealership, and one Volvo store. Asbury is also acquiring Park Place’s auto auction and its two collision centers.

The deal (Park Place was represented by The Presidio Group) is scheduled to close by the end of August and will cost approximately $735 million—$685 million in goodwill and $50 million for parts, fixed assets, and leaseholds, excluding vehicle inventory. Despite reducing the overall price from $1 billion to $735 million, the deal remains one of the largest in history. (See chart below for more information on the revised transaction).

Asbury also divested one Nissan store and its Mississippi platform — the Gray-Daniels Auto Family in March to the McLarty Automotive Group, headed by Mark McLarty.

The transaction should catapult the McLarty Group into the top 25 dealer group list with more than $1.7 billion in annual revenue. The Gray-Daniels group generates about $400 million in revenue annually with its five dealerships:

• Gray-Daniels Toyota
• Gray-Daniels Nissan Brandon
• Gray-Daniels Chevrolet
• Gray-Daniels Nissan North
• Gray-Daniels Ford Lincoln
• Gray-Daniels Collision Shop.

3rd Quarter Outlook

The next several weeks should see a flurry of activity. TBR knows of at least 30 buy-sells (five transactions) that likely will be announced in the next few weeks — in addition to Asbury’s Park Place purchase. It’s likely the industry will see between 50 and 70 rooftops sold by the end of August.

It’s true that most of these transactions are carryover deals delayed by COVID-19. But TBR is hearing from numerous sources that interest is back to pre-pandemic levels, with several new would-be buyers from the private equity sector looking to enter the market.

We also expect Prime Automotive Group’s 50+ stores to be sold to various buyers over the next several months due to the numerous legal issues with GPB Capital, the investment firm backing it.

In short, at least through August — and perhaps, September, buy-sell activity will be brisk. But predicting what happens after that in the current environment—the uncertainty around COVID’s overall impact on both health and jobs, coupled with the November election —has us putting the crystal ball on the shelf.

COVID’s Impact on Transactions:

Valuations. Initially, it was impossible to place a value on a store. Potential buyers started lowballing possible deals, but that was a short-term dynamic.

At the moment, the market has better clarity, as evidenced by the terms of the restructured Asbury/Park Place deal.

Deals have been restructured. Asbury revised the deal by reducing the number of stores, financing it with existing credit facilities and cash on hand rather than raising additional cash (as they had for the original deal), and leasing the real estate instead of buying it.

Lithia Motors also said in April it planned to restructure its pending deals by leasing the real estate (with the possibility of acquiring it later— we’ll see whether that plan is still in play when it announces its 2nd quarter earnings in a few weeks).

On the positive side, investors appear to be convinced, for now, of the resilience and necessity of the dealership retail model. Since March 18th, the eight public dealer group stocks (including CarMax and Carvana) are up an average of 151%. Vroom’s successful IPO and Shift Technologies’ pending IPO are additional evidence of investor confidence in the future of car sales.

• After the initial gut punch in late March and early April, dealers — even with their businesses shut down — found ways to sell vehicles. Dealer ingenuity, coupled with generous OEM incentives, kept the market from cratering.
• Franchised dealerships have shown they can compete with models or businesses that rely on home delivery and digital retailing services.
• The conversation that private ownership will disappear in the next few years appears to have been shut down and replaced with the belief that people will increasingly look to their vehicles as places of refuge — an extension of their personal space. So even if the short-term recovery of car sales may be less than exciting, the future of car sales should be strong.

Despite the better-than-expected industry narrative, however, much uncertainty still exists. That uncertainty will likely create a market beset by stops and starts, rather than a clear, linear upward recovery.

• The impact of lost revenue due to the drop in sales and service business has been delayed by the Paycheck Protection Program. As that money runs out, how many dealerships will find themselves in a cash crunch?
• On the consumer side, the additional $600 in unemployment benefits for laid-off workers is set to expire in a couple of weeks. What impact will that have on car sales?
• The uncertainty about how long COVID will be with us and how severe its impact on health will be will negatively impact the market.

Meanwhile, the normal dynamics impacting acquisitions are still very much in play.

Forces pushing transactions:

• Downward pressure on margins is making the business more difficult and less fun.
• Cheap money—capital remains accessible and financially viable.
• Newer, more complicated, and more costly technology is pushing less-capitalized dealers out.
• In the last four or five years — especially with the creation of the CFPB — compliance issues have become a major concern, prompting some dealers to look for an exit. Now, the issue in California may be the new data privacy laws that give dealers heartburn.
• Aging dealer body — this will continue to be a dynamic driving acquisition.
• 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 it may become more so over the next five years. Although this seems to be dying down.

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 by 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 sold its interest to GPB Capital in 2016).
• In the last four 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 has also kept a few buyers and sellers on the sidelines. First, it was the 2016 presidential election and the uncertainty about the winner’s impact on the auto industry. Then, uncertainty stemming from the Trump administration and the question of whether tax legislation would pass likely pushed the completion of several deals into last year.

Conclusions

• A stronger-than-expected 2nd-quarter recovery brought buyers back to the table.
• Delayed 2nd quarter deals are creating an active 3rd quarter.
• Private equity and other outside investors are once again expressing interest in the dealership market. If the recovery continues, this interest will continue. But any severe hiccups to sales will likely blunt investor enthusiasm.
• As dealers begin to lose the benefit of government stimulus programs, the industry could see a wave of distressed sellers. That could pique investor interest while bringing larger dealer groups that have sat on the sidelines to the table.
• Although capital remains accessible and interest rates remain low, Asbury’s restructuring of the Park Place deal may indicate it’s less available than before. That may be due to the high level of uncertainty surrounding commercial real estate.
• Buy-sell numbers for the remainder of the year and into 2021 will likely remain consistent with previous years — about 2% of the industry’s dealerships will have new owners.

Editor’s Note: The Banks Report began compiling dealership buy-sell data in 2013. Activity slowed to a trickle during the recession years of 2008 to 2010 and began to rebound in earnest in 2013.

Based on our research, no one had compiled a list of annual buy-sells prior to 2013. But judging from media reports and public dealership group SEC filings, it appears the most active buy-sell period was in the late nineties, driven by the aggressive acquisition strategies of the public dealer groups as they were forming.

While TBR does have the industry’s most comprehensive list of dealership buy-sells, we know it is not complete. There are deals that go unreported for numerous reasons. TBR also does not compile financial details of transactions because most deals are between private parties. To download an Excel spreadsheet with 2019 dealership buy-sells, click: 2019 TBR Dealer/BuySell List

2018 (To see a list of Buy-Sells for 2018, Click: TBR 2018 Dealership Acquisitions)

2017 (To see a list of Buy-Sells for 2017, Click: (TBR_Jan_Dec_2017_Dealership_Acquisitions)

2016  (To see a list of Buy-Sells for 2016, Click: 2016_Dealer_Buy_Sell_TBR_Jan_Dec)

2015 (To see a list of Buy-Sells for 2015, Click: Dealership_Buy_Sell_15_TBR)

2014 (To see a list of Buy-Sells for 2014, Click: Dealership_Buy_Sell_14_TBR)

2013 (To see a list of Buy-Sells for 2013, Click: Dealership_Buy_Sell_13_TBR)