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Buy-sell business could boom this year

This year's buy-sell activity is expected to outpace 2016's in volume -- if sellers continue to come to market and prices drop, buy-sell advisers say.

"We have projected this to be the most active buy-sell market in history," said Erin Kerrigan, managing director of Kerrigan Advisors in Irvine, Calif.

Kerrigan said the number of buyers and her client base of sellers are growing. In addition, sellers are starting to temper their price expectations, dealers and advisers said.

"We're seeing the rationalization of the prices by sellers," said Rick Ford, CEO of RFJ Auto Partners Inc., in Plano, Texas. "In 2015 and 2016, there were inflated expectations."

The anticipated robust activity is driven by continued low interest rates, stable new- and used-vehicle sales volumes, and expected growth in fixed operations revenue all resulting in profitable dealerships that appeal to buyers, Kerrigan said. Finally, many of the public dealership groups are returning to the buy-sell arena after spending much of last year buying back their stock instead.

One big uncertainty hangs over the market: possible policy actions by the Trump administration, especially ones that could impact taxes.

Still, "The volume of inquiries, as a general measure, from people wanting to buy is still very good," said Brad Bickle, director of the North Central region for advisory firm Tim Lamb Group.

The number of sellers is slim, but growing, Bickle said.

The combination of succession issues and the realization that the market is at a historic high, which makes this a good time to cash out, will prompt more sellers to step forward, predicted Tim Wild, director of the Midwest and Plains region for Tim Lamb Group.

He added that prices must come down. "For us to do more transactions, buyers and sellers have to have the same price expectations," Wild said. "People are now seeing things more realistically."

Domestic brands and volume imports will be in demand, said Kerrigan. Last year, domestic brands made up 51 percent of all buy-sell transactions, up sharply from 35 percent in 2015, she said. One possible reason for the jump: Buyers had to pay less upfront for domestics than for most luxury marques, while getting big returns from truck-heavy domestic brands.

Demand for luxury brands will dwindle, Kerrigan forecast. That's because "buyers know so much capital is needed to buy them, for less returns," she said.

On the sidelines

RFJ, part-owned by New York private equity firm Jordan Co., sat on the sidelines for much of 2016. RFJ bought only two dealerships last year: Ford and Toyota stores in South Bend, Ind. Those stores are expected to add $600 million in revenue, Ford said. RFJ slowed down after buying 28 dealerships from when it was formed in February 2014 through November 2015, Ford said.

"My partners never pressured me to buy for the sake of buying," Ford said.

Already this year, RFJ has purchased an Alfa Romeo dealership in Coeur D'Alene, Idaho.

Ford said he passed on two purchases last year because the seller was a retiring dealer and there was no operator to run those stores for RFJ. In other cases, the prices were too high. In 2015, McLarty Automotive Group outbid him for eight Joe Machens Dealerships stores, he said.

Ford continues to wrestle with two challenges: finding operators and high real estate prices. RFJ owns 98 percent of its land, making store improvements easier, Ford said. Still, if dealership prices soften, he will be a more aggressive buyer this year, he said.

"It's all about finding the right brand at the right price that fits our model," Ford said. "Our model is a Tier 2 market with population of 100,000 or less and we like to own the only [store selling that] brand in the market."Buyers

Holman Automotive Group in Maple Shade, N.J., plans to buy more stores this year as well, even after its colossal acquisition of Kuni Automotive last year. That deal made it one of the country's largest private dealership groups.

Brian Bates, CEO of Holman Consumer Services, told Automotive News, "We'll consider any opportunity in the country, if we have an alignment with the culture in that store that's for sale -- which is putting our employees first. It can be a small store or a big store."

Lithia Motors Inc. CEO Bryan DeBoer said the group's growth through acquisitions this year will match last year's pace, when it acquired 18 dealerships, including nine dealerships in the Carbone Auto Group. That deal is estimated to add more than $600 million in annual revenue.

"There's a fair amount of supply of available deals right now, so prices have, to some extent, subsided," he said last month at the Automotive News Retail Forum in New Orleans.

Group 1 Automotive Inc. sold roughly one store for every two it bought last year, while buying back about 10 percent of its outstanding shares. This year, Group 1 plans no stock buybacks, even though it still has $22.4 million authorized for share repurchases. CEO Earl Hesterberg said the buy-sell market is "dynamic" as more buyers and sellers came to market in the U.S. and United Kingdom in the last six to 12 months. But it will make acquisitions only if the price is right.

"We are very interested in growing in all of our markets," Hesterberg said. "We would prefer to deploy our capital to grow the business externally if we can find investments that meet our return hurdles." Among those hurdles: Acquisitions must promise to deliver 10 to 15 percent after-tax discounted cash flow.

Many dealers and buy-sell advisers remain cautious, saying policy uncertainties under the new Trump administration may stall deals until tax laws and economic indicators settle.

Still, deals are getting done. In January, Kendall Auto Group bought Edmark Superstore, one of Idaho's highest-volume dealerships. On Feb. 1, Larry H. Miller Dealerships said it acquired Corona Nissan in Corona, Calif.

"January's surprising us with renewed activity," said Moshe Stopnitzky, president of buy-sell advisory firm Performance Brokerage Services in Irvine, Calif. "I thought we'd reached a plateau last quarter."

Stopnitzky remains cautious on 2017 activity. "We still have too many sellers who are sellers for a price, meaning, "If you can get me X amount, I'm a seller,'" he said. "That's not a real seller."

Laurence Iliff contributed to this report.

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