TBR 2018 1st Quarter Auto Retail Vendor M&A Report

TBR 2018 1st Quarter Auto Retail Vendor M&A Report

April 4, 2018 — A flurry of announcements during the week of the annual National Automobile Dealers Assn.’s convention in late March capped what has been a busy first quarter for M&A activity for automotive retail vendors this year.

The 17 investments and acquisitions through March puts the industry on a pace to nearly double last year’s total of 35 deals.

Below is TBR’s analysis of deals consummated this year through the end of March. Our outlook for 2018 remains the same as what we wrote in February in our 2017 Annual Report on Vendor M&A Actvity.

However, we are adding a couple of names to our watch list for this year.

Companies we believe are buyers:

  1. Solera has cash and is a sleeping giant, we believe. We project the company will make further plays in the fleet management sector (adding to its acquisition this year of RedCap). But there also could be a surprising play on the DMS level.
  2. JD Power and Associates’ new CEO Dave Habiger told the audience at this year’s J.D. Power Automotive Summit in late March that the company is on the hunt for acquisitions — and it appears he is looking for deals that will drive revenue growth. We expect the Xio Group, which acquired Power in 2016 for $1.1 billion, will look to sell the company or to do an IPO in either 2019 or 2020.

Possible sellers:

  1. Cox Automotive has alerted customers in Europe that it is looking to sell Incadea, its international DMS that came with the Dealertrack acquisition. This could be the be the beginning of a series of moves for Cox to sharpen its strategic focus in the next couple of years to position itself to be a leading player in the fleet management arena. The company is already well-positioned with its ownership of Manheim and with several investments in the connected vehicle and fleet management world (Lidar Technology and Automotive Retail), but there may be pieces that don’t fit within the strategic path Cox is embarking on.
    1. Today’s announcement of the partnership announced today between Cox and Shift Technologies — an online mobile platform for peer-to-peer buying and selling of vehicles is an example of Cox’s creative forays into a new era of mobility. Cox is using Manheim to provide reconditioning, storage and marshaling services to vehicles in Shift’s fleet.
  2. Our timing is way off on this one, but we predicted in 2015 that Spireon’s acquisition of Inilex positioned it for a sale. We’re still waiting. Bertram Capital has owned the company since 2011 and is beyond the typical length of ownership for firms in its portfolio. Meanwhile, Spireon keeps innovating and developing new solutions for the franchise dealer market.

Eight of the deals have been in the online transaction space where investments have continued a frenzied pace since last summer bringing more than $1.7 billion in capital (more than $1 billion of it raised by Fair in the last eight months) — and nearly $3 billion since the middle of 2013.

It’s a crowded space with more than 25 different players with several new solutions being introduced during the NADA show in Las Vegas. Vendors have hyped the solutions citing surveys with customers wanting to complete the entire car purchase online. But, based on numerous conversations with dealers, the digital retailing concept isn’t playing out how most experts have predicted as F&I revenue appears to drop significantly with online transactions.

It’s still early for these companies, but at some point, dealerships will have to see solutions that drive profitability. (We are watching Cox Automotive’s new solution now being piloted in Las Vegas with 24 dealers. The solution — now only on Autotrader and KBB platforms but will be available on Dealer.com websites later this year — has strong early returns with deals starting on Accelerate generating a 80% increase in front and back end gross). 

  1. Fair completed the acquisition of Uber’s XChange Leasing portfolio in January. The book value of the 40,000 vehicles in Uber’s leasing program was worth a reported $400 million. As part of the deal, Fair becomes the exclusive partner for Uber’s drivers in the U.S. who want to lease cars for 30 days or more. The acquisition was funded with a loan facility from Goldman Sachs. Look for Fair to quickly ramp up in Uber’s top 14 U.S. markets throughout the year.
  2. Fair continues to raise money with the latest round being led by next47, Siemens’ global venture firm. Other investors include BMW, CreditEase FinTech Investment Fund, Millennium Technology Value Partners, 137 Ventures, G Squared, and Upfront Ventures. Look for Fair to make an international play — possibly this year, even as it ramps up national operations in 2018. We expect further investments this year as Fair likely will need to add to its debt equity financing as it adds vehicles to its portfolio — there should be a large jump in the number of vehicles as it incorporates about half of the 40,000 vehicles it acquired from Uber. Fair is pushing the other 20,000 vehicles through the auction.
  3. Santander InnoVentures invested in AutoFi, an online vehicle transaction fintech company. AutoFi raised $10 million in August in a Series A investment from current partners Crosslink Capital, Ford Motor Credit and Lerer Hippeau Ventures. AutoFi also announced earlier in the year a partnership with Chase Financial, the first of several national lending institutions it expects to bring on to its platform this year. AutoFi also announced in mid-March it will provide customizable lease and financing options for customers using Ford’s new Ready.Shop.Go online portal — an expansion of the partnership with Ford following Ford Credit’s investment in January 2017.
  4. CarLease raised $3.5 million in January in a seed round led by Lightbank with investors including former Cars.com president Mitch Golub, and DRIVIN co-founders Kayne Grau and Justin Mahlik. The company, led by former Cars.com director of product Andy O’Dower, partners with dealers to use a combination of a cloud-based app with a high level human touch to provide concierge-level leasing services to customers.
  5. Fresh off a $3.6 million seed round in October, mobile vehicle leasing company Honcker announced in February a Series A round of $23 million led by IAC (InterActivCorp). Founder Nathan Hoecht will use the investment to expand into new markets this year.
  6. Prodigy raised $5.4 million in a seed round led by 8VC, Battery Ventures, SV Angel and CrunchFund this month. The company was founded by Michia Rohrssen as part of Stanford’s StartXaccelerator program in 2016. It’s a tablet-based system that unifies the online and in-dealership shopping process.
  7. Fiserv, a global financial services companies, recently announced investment firm Warburg Pincus has invested $395 million for a 55% stake in its Lending Solutions division, a leader in automotive financial services. The investment creates a joint venture which will work with customers to develop solutions which may include vehicle subscription or online transaction services.
  8. AutoLoop announced the acquisition of Trade-In Valet during NADA. The online vehicle appraisal tool was developed in 2015 by Houston-based tech firm Carphoria. Although, not specifically an online transaction tool, appraising the trade in correctly is a critical part of the vehicle purchase.

This space will begin seeing more intense competition over the next couple of years. It’s an area that received scant attention in the industry, but effective fleet/loaner management is going to become a critical part of dealership operations as dealers look for areas to drive efficiency. In addition to the four acquisitions listed below, vehicle subscription solutions such as Flexdrive and Clutch provide fleet management capabilities. Also, keep an eye on DealerWare, a fleet management solution created last fall by the folks at SilverCar, Audi’s innovative car rental firm.

  1. Fair has had a busy first quarter. Along with announcing two investments (see above) Fair also acquired Skurt, a Miami and California-based startup that delivers rental cars to customers. Fair acquired Skurt for its technology which provides digital fleet management capabilities such as a an online central dashboard for monitoring vehicle deliveries and fleet location tracking along with enabling real-time notifications.
  2. KAR Auction Services acquires STRATIM Systems, a fleet management software firm for mobility providers based in San Francisco. Early investors in STRATIM included BMW i Ventures, Bessemer Capital, Norwest Venture Partners, Trinity Venture Partners, Flight Ventures and Grey Wolf. The deal reinforces TBR’s assertion that fleet management software enabling online fleet management services will be a critical tool — not only for fleet or mobility/ride sharing companies, but also for dealers and OEMs as they move into flexible ownership/vehicle subscription services.
  3. DropCar merged with WPCS International in a reverse merger transaction at the end of January. The newly combined company then began trading on NASDAQ (DCAR).
    1. DropCar, founded almost three years ago, began as a cloud-based app providing valet parking and concierge services for people in New York. The company maintains parking places throughout the city and uses trained drivers to pick up and deliver vehicles to the app’s subscribers.
    2. In addition, DropCar recently launched its Vehicle Assistance & Logistics (VAL) for dealers, fleet managers and mobility service providers. Early dealers signing onto the fleet management platform include Manhattan Motors (Porsche), Toyota of Manhattan, Mercedes of Manhattan, Lexus of Manhattan, and Jaguar and Land Rover of Manhattan. The company also recently signed agreements with two unnamed automakers.
    3. This is an intriguing deal that puts together two seemingly disparate companies. WPCS is a California-based firm that installs and services integrated structured cabling, audio-visual and security services for public services, healthcare, energy, and corporate enterprise markets in the U.S.
  4. Solera announced the acquisition of RedCap Technologies just prior to NADA a couple of weeks ago. RedCap provides mobility and logistics services to dealers including test drives delivered to the customer’s door, pick-up and delivery of service vehicles and on-demand ride sharing. The platform includes a robust API, dealer management system integration, and a white-labeled product for dealers and OEMs, and will be an integrated module of the Solera Digital Garage® platform. RedCap was a true startup founded by serial entrepreneur David Zwick eight years ago. He’s staying on as managing director of RedCap. (Presidio Technology Partners was RedCap’s financial advisor during the transaction).
  1. Dealers Auto Auction Group has purchased Rea Brothers Mid-South Auction from the Rea family, a move that expands the independent auto auction group into Mississippi.
  2. ACV Auctions secured a $31 million Series C investment led by Bessemer Venture Partners, Tribeca Ventures, SoftBank NY and Armory Square Ventures. The investment brings ACV’s total to $53 million raised since 2015. The company is in 35 markets selling about 1,000 vehicles a week. With the new funding, ACV plans to double its presence adding another 35 markets by the end of the year. ACV’s platform enables dealers to buy and sell from each other in 20 minute online auctions.
  3. This deal won’t be completed until 2019, but KAR Auction Services is spinning off its Insurance Auto Auctions (IAA) salvage auction business. Separating the two entities into separate companies will allow KAR to focus on its core businesses — auction and technology solutions serving OEMs, captive finance firms, vehicle lending institutions, fleets, and franchise and independent used car dealers.
  1. Reviver Auto, the world’s first digital license plate company, secured an $11.1 million funding round led by Australian-based ACK Group, with participation from WRV and a number of strategic individual investors. The company has gained approvals from the DMV and state legislators in California and Florida, with legislation currently in progress in Texas. It’s also signed an agreement with Galpin Motors in California as part of a push to place the rPlate on 100,000 vehicles in the state this year. Look for more dealer announcements along with a possible OEM announcement in the coming days. It’s the second round of capital for Reviver which raised $6.8 million in a round in 2016.
  1. Digital Air Strike is spreading its wings beyond automotive acquiring Eldercare Technology Inc (Dba Path Chat) in March. Path Chat is an AI messaging solution focused on the health care industry. Digital Air Strike, which provides social media, digital marketing, and reputation management services to dealers, has already integrated the chat-bot technology into its social media platform creating a new solution called Response Path. Look for DAS to continue to expand its presence in automotive while also building solutions for health care, education and other franchise-type industries.
  1. Cars.com announced the acquisition of digital marketing firm Dealer Inspire for $165 million with another $40 million possible after three years if certain benchmarks are met.
    1. The entrance of Starboard Value LP as an activist investor in Cars.com late last year has created speculation Cars.com could be sold and taken private. Starboard, following its normal practice, pushed for an additional four board members to be elected this May. Cars.com and Starboard agreed to add three board members while Starboard agreed to customary “standstill” provisions. In short, there will be changes at Cars.com over the next couple of years. Another key acquisition could (and probably should) happen. Meanwhile, a sale within the next year is not out of the question. It’s a company with strong cash flow and still has significant upside — makes for an attractive target.
  2. The “pending” acquisition of CDK Global appears to be off for now as talks have faltered between the tech firm and would-be buyers the Carlyle Group and Silver Lake. Both groups have been unable to agree on a valuation for CDK which had a market cap of approximately $9.5 billion earlier this year. Stay tuned on this one — it’s the second time since 2015 CDK has engaged in acquisition talks that have petered out. CDK’s stock price has dropped more than $13 since January and is now in the $63 range pushing its market cap down to $8.5 billion.
    1. This is an overly simple analysis, but if the stock falls to the mid-$50’s, we believe a sale becomes more likely. Although, if acquisition talks (we know of none going on currently) get leaked to the press — which is likely, the stock price will get pushed up, again making it harder to get a deal done. A lower stock price creates some room for the seller to get a premium on the stock price. At $75 a share, the premium is already baked into the price, whereas, at $55 a share, there is room to play.
    2. Another factor keeping a deal from getting across the finish line is that CDK has little opportunity for real, organic revenue growth. It’s already the clear leader in the DMS space and one of the two top leaders in the competitive digital marketing/website arena.
    3. A new DMS introduced before NADA (Drive Flex) aimed at the one to two store dealer groups will take time to roll out, and that mainly is a defensive play at the moment (as was the attempted acquisition of Auto/Mate).
    4. In the long run, Fortellis, the new development platform unveiled during NADA, may end up being a grand slam for CDK, but again, that will take a while.
    5. We’ll continue with our previous forecast that CDK will be an aggressive buyer in the coming months. Look for a couple of deals that will provide significant revenue growth. We’re still holding to our prediction that CDK will acquire CRM provider ELead1One. (However, CDK may decide to hold off on any significant acquisitions until it receives more clarity from the FTC regarding the antitrust investigation it has initiated against Reynolds and CDK — TBR’s speculation and not based on any conversations with CDK. Also lurking are the 12 dealer class action lawsuits and four vendor lawsuits currently in litigation (most of which are in multi-district litigation in the Northern District in Illinois).
    6. Another piece of news broke just before NADA — the Federal Trade Commission stopped the pending sale of Auto/Mate to CDK basically saying the deal would limit competition. The FTC determined Auto/Mate is the one DMS vendor with the most opportunity to challenge Reynolds and Reynolds and CDK in the market. (The Banks Report was the first to raise the possibility of the deal running into regulatory issues on June 4, 2017, nearly two months before the first sign of trouble when CDK informed investors on its August 1, 2017 earnings call that the FTC had requested additional information.)

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