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Buy-sell activity poised to rebound

Buy-sell activity last year slipped from 2015's record level, but brokers expect it to rebound this year as more sellers come to market with realistic price expectations.

Domestic brands and nonluxury import brands are hot. That's partially, but not entirely, because of their truck-heavy lineups, two buy-sell advisers say in reports out this week.

This year has "the potential to hit record levels," Erin Kerrigan, managing director of buy-sell advisory firm Kerrigan Advisors, in Irvine, Calif., wrote in her "Blue Sky Report" for the fourth quarter. 

"An increasing number of sellers [are] coming to market motivated by current prices," Kerrigan wrote. "As more dealers find their succession plans have run its course, the firm expects the number of sellers to rise given the generational shifts underway in auto retail and the aging of the U.S. dealer network." 

In addition, "Buyers are finding pricing more reasonable in part because today's sellers are serious about a sale," she wrote. "The market testers who were seeking "crazy'" prices, and didn't get them, have stepped away. 

Likewise, Alan Haig, president of buy-sell advisory firm Haig Partners, in Fort Lauderdale, Fla., wrote in his "Haig Report -- Year End 2016": "Financing is still readily available, and many sellers are realizing that if they want to sell their dealerships before the next recession, they will likely need to accept today's offer since tomorrow's offer is likely to be lower" because of softening sales and profits. 

In 2016, domestic brands accounted for 44 percent of all U.S. buy-sell transactions, up from 31 percent a year earlier, while import nonluxury brands dropped to 37 percent from 48 percent and import luxury brands eased to 19 percent from 21 percent, data from The Banks Report and Kerrigan Advisors show. 

Buyers sought truck-heavy franchises such as Ford, Chevrolet, Chrysler-Dodge-Jeep-Ram and Buick-GMC last year as low gasoline prices helped sales. 

Also, domestic brands -- which typically cost less than luxury brands -- appeal to nontraditional buyers such as private equity funds and family offices, which are focused on return on investment. 

Kerrigan said buyer demand is particularly evident for Ford, Chevrolet, Toyota, Honda and Subaru, which have lineups weighted toward crossovers, SUVs and pickups. Those five brands are the most requested by buyers, she added. 

"These franchises require less capital than the luxury franchises and less operational risk than the lower-multiple franchises," Kerrigan said. She wrote that the capital required for the average domestic acquisition is 56 percent less than that required for the average import-brand purchase and 65 percent less than that for the average luxury franchise.Blue sky

Kerrigan and Haig left their blue-sky estimates -- which they caution can vary widely depending on a given store's unique situation -- largely unchanged. Blue sky is the intangible value of a dealership, usually expressed as a multiple of adjusted pretax profit.

Haig wrote, "Multiples for most franchises remain near peak levels, except for several premium luxury franchises which have suffered a meaningful decline in demand due to flat to declining sales and an erosion of vehicle margins that together have hurt profits at these franchises."

Indeed, while he still rated Mercedes-Benz and Lexus as tied for second in blue-sky values, trailing only Porsche, he trimmed his estimate for both brands to between 7 and 8 times earnings. Since his report for the first quarter of 2016, it was the third time he trimmed Mercedes and the second time he trimmed Lexus.

At that time, he had estimated Mercedes-Benz's blue sky at between 7.5 and 10 times earnings and Lexus' at between 7.5 and 9 times earnings.

Kerrigan issued a "negative" outlook on Fiat Chrysler, citing its plans to add about 400 open points, its weak future product plans and declining sales.VW views

But both turned at least somewhat upbeat on Volkswagen.

Kerrigan awarded VW a "positive" outlook as it emerges from the diesel-emissions scandal, saying it garnered goodwill among consumers and its dealers.

Haig remained leery of VW dealerships' long-term profit growth. While the brand will add the crossovers that it was lacking, many U.S. consumers appear to have abandoned the brand, he wrote.

"We hear less than" 30 percent of customers who bring in diesel vehicles that the automaker, under terms of a settlement with the federal government, is required to buy back are replacing their vehicle with another Volkswagen, vs. a typical retention rate for many brands of 50 percent.

That "means too many customers are tossing back the keys and headed towards the competition. Many of these diesels will end up being scrapped, which will reduce the number of units in operation. This is not great news for VW service departments," he added.

Given that blue-sky values are a multiple of earnings, variable and sometimes negative earnings at Volkswagen and Volvo dealerships led the Haig Report to decide not to designate multiples for those brands.

With VW's scandal behind it, Haig upped his blue-sky estimate to $500,000 to $2 million from a previous $0 to $1.5 million.

There were 223 total transactions last year, down 7.5 percent from 241 in 2015, Kerrigan said, citing data from The Banks Report. But the number of transactions involving multiple-store dealership groups jumped 7.5 percent to 57 from 53.

The publicly held retailers were notably quiet in the buy-sell market in 2016. Lithia Motors Inc. and AutoNation Inc. were the only two to buy U.S. dealerships last year, Kerrigan and Haig said.

Instead, publicly held groups were spending their money elsewhere: on stock buybacks, used-only dealerships, collision centers, foreign dealerships and commercial truck operations.Real estate

Buyers and sellers can expect rising commercial real estate costs to elevate transaction values this year, which could initially benefit sellers, Kerrigan wrote. But, she warned, dealers with high rent or expensive property can "suffer greatly during a downturn," noting that "the decline in average dealership earnings last year was nearly the exact amount as the increase in rent expense."

When a manufacturer requires a buyer to improve a facility as part of an acquisition, it has a negative effect on the blue sky a buyer will pay. Kerrigan expects factory image programs to remain a thorny issue this year.

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