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Expect $1 Billion in US Purchases by Public Dealer Groups for 2014

IRVINE, Calif. - In the dealership buy-sell market, it’s still the private buyers who are making the biggest waves, but that’s not to say all is quiet on the public retailer front, according to Kerrigan Advisors.

The Kerrigan Quarterly Blue Sky Report for Q3 acknowledges that public dealer groups have continued to “focus on non-auto dealership and international investing,” while the private retailers “continue to represesent the largest share of dealership acquirers," citing data from The Banks Report. 

But the report also points out that U.S. acquisition spending by the public dealer groups is expected to surpass $1 billion this year, which would be a 10-year high.

“With the completion of AutoNation’s acquisition of Barrier Motors in November, 2014 will likely be one of the highest spending years since the publics were formed,” the report notes.

Year-to-date through Oct. 1, the publics have spent $851 million on U.S. acquisitions (excluding Penske commercial truck acquistions), an increase of 163 percent, according to the report. Most of that increase (68 percent), Kerrigan Advisors indicated, was concentrated in one deal: the $362 million purchase of DCH Auto Group by Lithia Motors.

That purchase closed on Oct. 1, and during Lithia’s conference call later that month to discuss third-quarter results, president and chief executive officer Bryan DeBoer said the DCH stores are estimated to generate approximately $2.3 billion in annualized revenue.

“The transition on Oct. 1 was very smooth. We spent really the last 120 days preparing for that transition,” DeBoer said during the October call. “It’s a combination of two organizations. However, we really believe that our opportunity is to build upon their success and continue to expand their market share and their offerings to their consumers. So all in all, very smooth transition.”

Lithia and Group 1 Automotive, by far and away, have led the public groups’ acquisition spending this year, with the pair having shelled a grand total of $713 million year-to-date through Oct. 1, the Kerrigan report indicated.

Put differently, 84 percent of the U.S. acquisition spending from public groups has come from those two.

“That said, Group 1 also divested eight franchises during the first three quarters of 2014 for a total consideration of $139 million,” the Kerrigan report stated.

“In Kerrigan Advisors’ view, Group 1’s divestitures are an indication of their management discipline,” it added. “Clearly, their executive team is executing on a strategic plan focused exclusively on high-growth, business-friendly markets. They are divesting stores that don’t fit that plan and are timing those divestures to capitalize on today’s attractive blue sky values. In the long run, this plan will likely result in a more cohesive and higher valued group.”

Group 1 president and CEO Earl Hesterberg touched on this during his company’s third-quarter conference call, as well.

In Q3, Group 1 divested its BMW, Mini, Mercedes-Benz and Sprinter franchises and associated dealership real estate on Long Island in New York. The company also disposed of a Honda franchise in Freehold, N.J., and divested a Volkswagen franchise in Holiday, Fla.

“In the case of exiting the Long Island market, it was just very high-cost place to do business,” Hesterberg said. “We had some major capital expenditures required that was only going to make that worse. And we just didn’t have a consistent track record of generating the profits that we needed for a good return for our shareholders.

“So we had opportunities to invest in places like Texas, where we are highly confident that we have scale, leverage and know what we will get out of an investment,” he continued. “It was really kind of a shareholder-driven thought process.

“Each market is so different and the dynamics are so different. We’re constantly evaluating that, and it’s kind of hard for me to prognosticate much beyond that,” Hesterberg added about what Group 1 might do next.

However, Hesterberg did discuss how Group 1 is performing regionally, reiterating the company’s strength in the Lone Star state.

“Texas remains very strong and so does Boston and New Hampshire,” Hesterberg said. “The weaker area for us has been New Jersey and New York. We exited New York, and New Jersey is still a challenge for us.

“We have dealerships in Atlantic City, and you've probably read about the casinos and some of the issues in that part of the world so that’s still a weak area,” he continued. “Also on the Gulf Coast, in particular, New Orleans, in fact all of Louisiana, the new-car market is down significantly this year.”

And with Lithia gaining a presence in the Northeast following its acquisition of DCH, naturally that was a topic that came up during Lithia’s call, as well.

One Wall Street observer asked Lithia leadership of its concerns about entering the Northeast after Group 1 discussed the high costs of doing business in that region and its subsequent disposal of a couple of stores.

“I don't believe there is any intent to dispose of any stores,” DeBoer said. “I think when you look at the New Jersey market or southern New York market, it's obviously highly competitive. We're very fortunate that the DCH brand that they built in New Jersey, New York has high customer belief and adhesion to the dealerships, the products that they sell, Honda being the No. 1 product in the Tri-State area

“Their stores are top stores within that area and their personnel have been there a long time,” he continued. “I think it's also important to restate that in the DCH transaction, their real estate and their locations, being in good locations, solid locations, typically on interstates or expressways and are 75 percent-plus of their facilities are owned, much like what Lithia is, which adds for stability of location without having to be transient to some extent in those locations.”

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