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It Takes Two: Who is Buying All of these Dealerships?

In prior columns in this magazine, we have discussed the robust transaction market for auto dealerships, a trend that has now been in full force for over five years.  To give you a sense of the pace of change in our industry, between 2014 and 2017, an estimated 1,080 dealerships sold, to a total of 612 different buyers!  The transaction statistics tell a story of the big getting bigger as well, with 28 different players acquiring more than five stores during this period, and 10 players acquiring more than 10 dealerships during this four-year span.  Since 2011, the number of private dealer groups with greater than 10 dealerships has risen to 141, a 57% increase.

Chart I
Number of Dealership Buyers
2014 – 2017 Q3
Source: The Banks Report, Kerrigan Advisors Analysis
Chart II
Number of Dealership Groups with Greater than 10 Dealerships
2011 – 2017 YTD
Source: NADA

For many, it is intuitive as to who is selling, given the thousands of family dealership businesses, often extending to the second, third, and even fourth generations.  That said, I often get the question: Who are all of these buyers?  It is a great question because each of these transactions requires a seller, and a buyer, to come to terms.  And, we are finding today’s buyer pool to reflect a more heterogeneous set of acquirers versus prior years.
Here, I will outline the various types of buyers that we are seeing active in the current buy/sell market.

Local and regional buyers.  Consistent with the past, there continue to be local and regional dealership groups that are opportunistically seeking to get larger. This has been true in our industry for decades, and continues to be true, with an added imperative for growth that many of these businesses now feel.  Gaining size is now seen as the antidote to higher levels of fixed cost, heightened compliance requirements, complex and expensive technology platforms and the ability to in-house sophisticated marketing and social media resources. Many of the local dealership groups, viewed as the “big boys” in their local markets, tell us that   they need to get even larger in order to thrive in an ever-changing retail environment. This is creating selling opportunities for dealers, and families, with single stores or small regional groups of stores.

Super regionals.  Consolidation has now created a new set of private dealership platforms that have expanded beyond local platforms, and are now running dealerships groups in multiple geographies.  These are privately funded companies with very deep auto retail experience that see the opportunity to grow in our highly fragmented industry, and have taken on the challenge of managing across geographies.  Sometimes these platforms are relatively transparent in their ownership; in other cases, they rely on local general managers and do not advertise the scale of their holdings.

Auto retail public companies.  There are seven publicly traded US companies focused on auto retail – AutoNation, Penske, CarMax, Group 1, Lithia, Asbury, and Sonic.  These companies have continued to complete acquisitions, although not at the torrid pace of the 1990s and early 2000s when they were being built on aggressive acquisition strategies.  In the first nine months of 2017, these companies spent, in aggregate, $812 million on US dealership acquisitions, representing a 61% increase over the first nine months of 2016.  These companies will continue to acquire dealerships, though they do have limits imposed by OEM framework agreements which dictate the number of stores they can buy with certain OEMs. We have also seen the publics deploy cash flow outside of dealerships, such as AutoNation’s aggressive move into auto parts, collision centers and used cars centers in 2017.

Chart III
Public Auto Dealership Group Capital Expenditure ($ in Millions)
First Nine Months 2016 vs. First Nine Months 2017
Source: SEC Filings for AutoNation, Penske, Group 1, Asbury, Sonic, and Lithia

Private equity / Family Offices.  In recent years. there has been a lot of talk of private equity and family offices coming into auto retail.  There are a few examples of a successful entrants, primarily in the form of family offices.  It is worth making the distinction that private equity firms have made very few acquisitions, and the primary reason is that most private equity firms have a relatively short period of time for which they can hold their investments (typically 5 to 7 years), which has made OEM approval difficult.  However, family offices, which operate in a very similar manner to private equity with the exception that they can hold their investments indefinitely, have been more successful in getting some deals done given their longer investment horizon.  We continue to see a handful of large family offices active in the space and seeking further acquisition opportunities.

Private Capital.  A significant new trend we are seeing is auto dealership groups taking on investors, in lieu of an outright sale. We estimate that 72 transactions in 2017 were not a 100% sale, but reflected the sale of the majority or minority of the business to a capital partner. This is a relatively new phenomenon in auto retail, but we think it is an important trend given the increasing costs to grow, build image compliant facilities, and successfully complete acquisitions.  Specifically, we see high net worth individuals investing directly into dealerships, or partnering with experienced dealer operators to make investments.  In some cases, these investments are quite large, up to $100 million.

International players.  To the surprise of many, we are regularly contacted by auto-related companies from around the world who are interested in US auto retail.  An example of this is PON, a multibillion dollar privately owned auto distribution company in the Netherlands, that identified US auto retail as an attractive opportunity for expansion, and made a significant investment in Indigo Auto Group.  We currently have two clients under contract with international auto retailers who will be making their first acquisitions in the United States, and we are in conversation with additional players also looking to make their first acquisitions in the US.  Our industry has not seen a lot of cross-border transactions, but we do see this as an interesting shift in a continually globalizing economy.
In short, there are many different types of buyers active in today’s buy/sell marketplace.  No longer are the local dealership players the only exit opportunities for dealers considering the sale, or capital-raising, process.  As the auto retail business model evolves, the ownership structure of the industry is also evolving.  And, the range of buyers for your dealership may be a broader pool of players than you may have imagined.

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