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Berkshire Hathaway Buys Into a Family Business

Berkshire Hathaway Inc. 's purchase of a mega-car dealer group has billionaire Warren Buffett buying into a family business—in more ways than one.

While the Van Tuyl Group is big, collecting $8 billion in 78 stores scattered across 10 states, it is at its core a family-run business. Founded by Cecil Van Tuyl in 1955 with a Chevy dealer in Kansas City, the group blossomed in the following decades. His son Larry joined the company in 1971, expanding to consulting.

The fifth-largest U.S. dealer chain by car sales and revenue, in many ways, looks like countless other auto-retailing outfits in America. Michigan has the LaFontaines, Wisconsin has the Bergstroms, Texas has the Sewells, Arizona has the Sandersons. And the list goes on. Often, these families are well-known because of the countless community sponsorships they support, such as Little League baseball, and because they are major local advertisers.

The high concentration of family ownership in the dealer business means the industry remains highly fragmented, with publicly traded companies only about 8% of the revenue, even with the rise in dealership M&A.

As many of the founders of the smaller businesses get older, they have been cashing out and selling to bigger players. AutoNation Inc., Penske Automotive Group, Sonic Automotive and Lithia Motors are some of the publicly traded dealership firms that have shown an appetite to acquire smaller or even similarly sized rivals.

Erin Kerrigan, founder and managing director of Kerrigan Advisors, a dealership merger and acquisition consultant, said that with many dealers nearing retirement age, the industry has undergone a wave of consolidation in the past few years. She said there are still many large, privately held groups with owners who are getting to the age where it might look attractive to sell off the business.

"This transaction is going to be a harbinger of what's to come," Ms. Kerrigan said. "We'll see many more large, family offices buy dealership groups."

Mr. Buffett will be one of the few players with access to the type of capital needed to lure longtime owners to sell. While terms of the Van Tuyl Group weren't disclosed, the all-cash deal is likely far out of the reach of most of America's dealer groups.

Berkshire Hathaway is buying into an industry where the number of independent shops is dwindling, however. The U.S. new-car dealership count dwindled to about 17,700 last year, from about 30,000 in 1970, according to the National Automobile Dealers Association. The consolidation was helped along in 2009 when hundreds of dealerships were closed during the bankruptcies of Chrysler and General Motors Co.

The survivors are enjoying a booming business. Auto sales are tracking at near-decade highs, and demand for trucks, luxury cars and SUVs (long the cash cows of the auto industry) is sizzling. This has boosted profitability. And, having survived the U.S. auto industry's painful restructuring in 2008-2009, many dealers are benefiting now from strong used-car prices.

"Some of these dealers are flush with cash," said Cliff Banks, president and founder of the Banks Report, which tracks the auto-retail business. "They restructured their businesses [during the downturn], streamlined them, cut out costs, and sales have rebounded faster than expected."

But winning in the auto-dealer game is less about moving metal and more about selling finance, insurance and service products. Some dealers have their own finance arms, but most have strong relationships with so-called captive finance arms, such as Ford Motor Credit, or auto-finance giants such as Ally Financial.

Low interest rates have made it easier to offer cut-rate leases and auto loans. Dealers typically enjoy bigger margins on finance products than on the sale of a new or used car.

NADA in its 2014 industry report said new-vehicle profit-per-vehicle fell to $69 in 2013 from $111 the prior year. Used vehicles returned $254 in per-vehicle profit, up from $194 in 2012.

Finance and insurance products, meanwhile, can be money machines. Combined sales from F&I, service contracts and other products accounted for 38.8% of gross profit in the new- and used-vehicle departments in 2013.

Some of Mr. Buffett's new peers are welcoming him to the table already. The acquisition "is a validation that auto retail is a solid, long-term investment," AutoNation Chief Executive Mike Jackson said. Mr. Jackson has been telling investors that the U.S. auto sales cycle isn't headed for a big fall, as some forecasters have warned, but still has room to run.

A big question is how quickly Mr. Buffett can snap up more stores to add to his collection. The bigger Berkshire Hathaway's auto dealership business gets, the easier it will be to influence auto makers when it comes to sales strategies or even product plans.

In a note to investors, Wells Fargo equity analyst David Lim said auto makers still limit the number of franchises owned by a single dealer group and dealership acquisition costs are elevated relative to historic trends.

According to Kerrigan Advisors, dealership buy and sell activity was up 60% in the first quarter this year, with the majority of those transactions—83% -- coming from privately owned groups. Their dominance is reflected by the rising number of private dealerships with sales of more than $1 billion. Last year, there were 36 private dealerships with $1 billion plus sales, up from just 14 in 2010 and 11 in 2009.

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