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Buy-sell activity brisk

As more dealerships hit the market, buy-sell activity is continuing at a strong pace early in 2019, buy-sell advisers say.

Dealers are opting to acquire stores to add scale, shed certain franchises or exit the business while dealership values, despite some dips, remain relatively high. The brisk pace of deals also comes despite slowing new-vehicle sales, margin pressures and rising interest rates. Dealers also are making less money, with the average dealership's net pretax profit dropping 2.6 percent last year to just shy of $1.4 million, according to National Automobile Dealers Association data.

The active start to the year follows healthy 2018 dealership sales. Last year, 364 individual dealerships in the U.S. were sold, according to The Haig Report, which is published by Haig Partners, a buy-sell advisory firm in Fort Lauderdale, Fla. The number of deals rose 10 percent from 2017, though the sales pace slowed in last year's fourth quarter.

Kerrigan: “More volume”

Kerrigan Advisors, a sell-side firm in Irvine, Calif., tracks a different metric and last year counted 216 buy-sell transactions, including those in which multiple stores were sold. That transaction count rose 6.9 percent from 2017. Last year marked the fifth straight year of more than 200 deals, and 2019 transactions could exceed 2018 as more sellers have put stores on the market, said Erin Kerrigan, managing director of the firm.

"There's more volume of transactions available and because that increased volume is being met by an increase in the number of buyers, especially those with capital partners, I do think you're going to see an increase in activity in 2019," said Kerrigan, who publishes The Blue Sky Report.

Investor interest

Kerrigan said she has seen a huge jump in her firm's database of professional investors interested in auto retail. The database includes private equity firms, family offices and high net-worth individuals. While Kerrigan Advisors added just nine such investors in 2015, 87 were new to the list last year and the company is on pace toadd 138 more this year.

Alan Haig, president of Haig Partners, has seen renewed interest this year among private investors. He believes some private investors were spooked from auto retail last year amid talk of a slowing sales market and industry disruption.

Haig noted his business has already advised on the sale of 10 dealerships in January and February.

It's been a "very busy first quarter and our pipeline is still very full," Haig told Automotive News. "Our perspective is it's going to be a busy year."
Dave Cantin, CEO of merger-and-acquisition firm Dave Cantin Group, had 39 dealership listings and/or transaction closings last year collectively valued at about $1.6 billion. Cantin didn't disclose the number of closings.
His company, founded in early 2018, is expanding staff and offices nationally. Cantin told Automotive News his business has been "extremely busy" during the first three months of 2019. For example, Dave Cantin Group served as broker for both buyer and seller in January when Ed Morse Automotive Group of Delray Beach, Fla., bought three dealerships from Roundtree Automotive Group in Texas.
While sales are hearty, blue sky values have dropped slightly. Blue sky is the intangible value of a dealership, typically expressed as a multiple of adjusted pretax profit. In 2018, the average dealership blue sky value dipped 5.3 percent to $6.5 million, according to Haig's report. Haig also cut blue sky multiples on 12 of 22 brands it rates. Kerrigan estimates the average blue sky value fell by about $200,000 last year.
"While blue sky's come down, when you include real estate, dealerships are still today trading at record values," Kerrigan said.
Buyers also are choosier than in the past, Kerrigan and Haig said.

‘Flight to quality'

Haig said there's more "flight to quality" than in past years, with dealers preferring to buy stores representing Tier 1 brands and in their home market.

Kerrigan said buyers increasingly are avoiding certain underperforming brands and looking only at strong ones. She expects stores representing brands such as Toyota, Honda and Subaru will continue to see growth in buy-sells this year.

The public dealership groups likely will be judicious in their buy-sell activity this year, the advisers projected. In 2018, the publics spent 25 percent less on U.S. dealership acquisitions, according to the Haig Report, and the six public new-vehicle retailers collectively were net sellers.

Both Haig and Kerrigan expect to see the public companies continue to pare their portfolios, while some will pick up quality acquisitions.

"They'll continue to trim and selectively add as a group," Kerrigan said.

Dealership buy-sell activity is continuing at a brisk pace in 2019, despite slowing new-vehicle sales, margin pressures and rising interest rates.

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