Dealer acquisitions, value of deals continue to increase

Oct. 23, 2013
The number of auto dealerships sold to private buyers rose by more than 2.5 times in the first half of 2013 compared to 2012, while the value of U.S. acquisitions by public retailers rose 8 percent.

As automotive dealership profits rise to near record levels, interest in acquiring dealers is up. According to a new report from The Presidio Group, the number of auto dealerships sold to private buyers rose by more than 2.5 times in the first half of 2013 compared to 2012, while the value of U.S. acquisitions by public retailers rose 8 percent.

According to Presidio's mid-year "Automotive Retail Buy-Sell Report," this activity is being driven by all-time-high dealer profits; a healthier dealership base; dealership acquisitions providing high rates of return; and demand for franchises outstripping the number of interested sellers.

“The window is wide open for dealers who are interested in retiring and/or selling their businesses,” said Alan Haig, head of automotive services at Presidio Merchant Partners, the investment banking arm of The Presidio Group. “Dealership values are high because profits are strong and there are more buyers than sellers in the market today. We’re also seeing more deals done at higher prices. Transaction values of $50 million or more used to be pretty rare, but now there is greater interest in deals of this size from both public and private dealership groups. In fact, private groups may be the most aggressive buyers at this time.”

This represents the continuation of an ongoing trend. Dealer acquisitions hit rock bottom in 2009, with public company acquisition spending only reaching $20 million in the U.S. By 2011 that figure had jumped to $500 million, then to $502 million in 2012. Moreover, international acquisitions went from just $12 million in 2009 to $224 million in 2012. For the first half of 2013, U.S. acquisitions total $133 million, while international buys have reached $248 million.

Through the first half of 2013, there were 26 acquisition announcements between private buyers, compared to 10 in the first half of 2012. "That is a significant increase, and we believe that is largely indicative of the level of spending going on right now," Haig says.

There is also a population of dealers that has been waiting to exit the industry. "There is an aging dealer group out there who would have sold their dealerships between 2008 and 2010, but because of the recession decided not to," Haig says. "You could call it pent up demand to sell. But that's also married with the strong profits dealers are showing, so the value of these stores is high and buyers are motivated to put capital to work today, because they see the future is likely to be good for dealership profits. For sellers, it's a good time to get out; for buyers, it's an optimal time to buy, too."

Profits up, dealership footprint rebounding

Profits are up, in part, because dealers have focused on cost cutting since the recession, and put more focus on service and parts sales in the face of declining new vehicle sales. As sales have rebounded, dealers have had a dual focus on new sales and on attracting more customers with out-of-warranty vehicles to their service centers.

If the current acquisition trends continue, Presidio expects public acquisition spending could reach levels not seen since 2007 when total domestic and international spend reached $780 million.

Low interest rates and more access to credit (including for subprime borrowers) are also helping boost dealer values. And there's the increase in U.S. light vehicle sales, which have rebounded to just north of 14 million units as of last year, and are expected to exceed 15 million units in 2013.

The significant drop in the number of dealerships during the recession has also helped boost profitability. "The remaining dealers have the same sales going through fewer dealers, so there are higher profits per dealer," Haig says.

That trend is starting to reverse, with some brands adding new dealerships. According to the latest industry data from the National Automobile Dealers Association (NADA), there was a net increase of 95 franchised dealerships in the U.S. last year.

"When you are going into a recession and dealerships are closing, that's not good news for anybody who wants to be confident in buying a location," Haig says. "Now I think people are confident in buying stores. Add points have an unsettling effect on buyers, because it's no fun for them to spend tens of millions on a dealership only to see it have a new competitor coming into the market. Those brands that are growing rapidly through add points will diminish the value of existing franchises in those markets."

Haig says he was surprised at the level of international spending, given the return rate on domestic dealer acquisitions. Both Group 1 and Penske are branching out overseas, for example.

"I was surprised that several of those large groups are spending a lot of money abroad," Haig says. "There is still plenty of opportunity in the U.S., but their management teams have decided that the return on their capital is better outside the country than in."

Big jumps in dealer profits may be on the way out, however. Data from NADA shows that profits for the year ended May 2013 were only up 1 percent, and stock prices for public retailers has been flat.

Domestic brands considered good investments

Domestic OEMs are catching up with their foreign competitors in terms of sales per franchise, and have increased their desirability as acquisitions.

"Prior to the recession, domestics had been giving up market share to Toyota and Honda, and buyers were only confident about those brands, along with Mercedes, BMW and Lexus," Haig says. "That's leveling out now, and public companies are buying Chrysler/Jeep/Dodge stores, and seeking out Ford and GM dealerships. Right now, almost every franchise is doing well."

While dealers will have to keep a tight rein on costs as profit margins shrink, Haig says he expects the sales outlook to remain positive for several years to come.

"We're still adding millions of people to the population, and many of them are going to purchase cars and need transportation," Haig says. "The age of the fleet is also growing, so it's quite possible we will get back up to and surpass peak sales volume of 17 million units.

"This is really a golden period in the industry," Haig adds. "Profits are as high as they've ever been. I feel bad for the dealers that lost their franchises in the recession, but it has had a beneficial impact on the surviving locations."

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