M&A among car dealers expected to reach record levels in the second half of the year

Written by:
Demitri Diakantonis
Mergers & Acquisitions
August 25, 2020

Car dealerships saw a drop in sales during the height of the pandemic from the slowdown in production with less people driving, and that impacted some deals. For example, Asbury Automotive Group Inc. (NYSE: ABG) originally backed away from its $1 billion acquisition of Park Place Dealerships. However, citing a pickup in business, Asbury revived the deal for $735 million. Now some dealmakers are predicting robust sector dealflow in the second half of 2020. Mergers & Acquisitions spoke with Erin Kerrigan, managing director of auto dealership-focused investment bank Kerrigan Advisors about deal trends in the industry.

How has the pandemic impacted the auto dealership sector?
The pandemic has dramatically impacted auto retail both from a positive and negative standpoint, with the positives outweighing the negatives. The clear negative was the economic shutdown of April and March. However, the positives are the incredible sales rebound in May, June and July, coupled with strong gross profits and lower variable expenses.

We expect the second half of 2020 to be a highly profitable one for most auto retailers. The pandemic has highlighted the resilience of the auto retail business model, particularly dealers’ ability to increase gross margin and reduce expenses quickly to grow profits, despite a decline in new vehicle sales.

What is the industry doing to bounce back?
Dealers are increasing their used vehicle sales, which are much higher margin than new vehicles, and improving the efficiency of their operations by reducing headcount. Most dealers have also focused on increasing gross margins on both new and used vehicles and F&I, resulting in a rebound in profits to pre-pandemic levels in June.

How are dealerships adjusting to changes in consumer behavior?
They are quickly ramping up their digital retailing efforts and creating touchless sales processes.

What other subsectors in auto have been affected?
Used vehicle sales have risen tremendously as new vehicle inventory slims down due to production delays.

What is your forecast for M&A for the balance of 2020?
We expect M&A to reach record levels in the second half of the year as buyers are bullish on the industry’s earnings growth, attracted to auto retail’s resilient business model, and able to capitalize on the low cost of capital in today’s low interest rate environment. We are also seeing more sellers coming to market and ready to exit at today’s high prices, particularly those without a clear succession plan.

About Kerrigan Advisors

Kerrigan Advisors is the premier sell-side advisor and thought partner to auto dealers nationwide. The firm advises the industry's leading dealership groups, enhancing value through the lifecycle of growing, operating and, when the time is right, selling their businesses. Kerrigan Advisors has represented some of auto retail's largest transactions and advised more of the largest dealership groups in the US than any other buy/sell firm in the industry. Led by a team of veteran industry experts with backgrounds in investment banking, private equity, accounting, finance and real estate, the firm does not take listings, rather they develop a customized approach for each client to achieve their personal and financial goals. In addition to Kerrigan Advisors' sell-side advisory and capital raising services, the firm also provides a suite of consulting services including growth strategy, market valuation assessments, capital allocation, transactional due diligence, open point proposals, operational improvement and real estate due diligence.

Kerrigan Advisors monitors conditions in the buy/sell market and publishes an in-depth analysis each quarter in The Blue Sky Report®, which includes Kerrigan Advisors' signature blue sky charts, multiples, and analysis for each franchise in the luxury and non-luxury segments.—To download a preview of the report, click here.—The firm also releases monthly The Kerrigan Index™ composed of the seven publicly traded auto retail companies with operations focused on the US market. The Kerrigan Auto Retail Index is designed to track dealership valuation trends, while also providing key insights into factors influencing auto retail.—To access The Kerrigan Index™, click here.—To read the—2023 Kerrigan OEM Survey, click here.—Kerrigan Advisors also is the co-author of NADA's Guide to Buying and Selling a Dealership.

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