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New era afoot for dealership M&As?

Lithia Motors Inc.'s purchase of DCH Auto Group Ltd. will have major implications on the buy-sell market going forward.

It could spark more activity, perhaps prompting bigger dealership groups to buy other large groups in the next year or two, brokers say.

The deal appears to disprove the theory that larger dealership groups need to be broken up and sold piecemeal because of barriers to acquiring them. Yet the Lithia-DCH case is unusual because of the very limited overlap in the two groups' brand mix.

Lithia, of Medford, Ore., will pay about $340 million in cash and another $22.5 million in Lithia stock to acquire DCH, of South Amboy, N.J. The deal is expected to close in the fourth quarter. The merged company is expected to have annual revenues of $7 billion.

Brokers say this may be the largest single U.S. dealership acquisition ever.

Ranking buy-sell deals by size isn't easy. Some purchase prices are inflated by including real estate, which others exclude, and data is unavailable for some roll-up deals done in the 1990s when groups were preparing to go public.

But Lithia-DCH at least rivals Sonic Automotive Inc.'s 1999 purchase of FirstAmerica Automotive Inc. and its 29 dealerships. Sonic paid about $232 million in stock but also assumed about $175 million in FirstAmerica's debt.

"For Lithia, which has been a West and Midwest company and secondary market consolidator, to branch out and buy this big $2 billion operator with stores in metro markets is really quite a statement," said Brodie Cobb, executive chairman of Presidio Group, a San Francisco dealership broker and advisory firm.

He added, "When you start to see M&A in a certain sector and see these larger transactions, you tend to see repetition."

No auction

DCH was not on the auction block and did not seek competing bids, said DCH President George Liang. In part, that was because the two groups already knew each other and the chemistry was right.

For several years, executives from the two groups have met periodically to share best practices. The meetings were casual but productive, the companies' executives say.

"We started to like each other, feel comfortable and challenge each other with the exchange of ideas," Liang told Automotive News.

At the time, there was no talk of merging, and DCH was not for sale. But in January, when executives from the two sides met at the National Automobile Dealers Association convention in New Orleans, the idea of joining forces started to take form.

"The more we talked," Liang said, the more "it made perfect sense."

Lithia, the smallest of the six public new-car retailers as measured by new retail units, has annual revenue of about $4 billion. AutoNation Inc. of Fort Lauderdale, Fla., the country's largest dealership group, had revenue of $17.5 billion in 2013. 

Lithia has long wanted to buy dealerships east of the Mississippi River. Lithia currently has 101 stores in smaller markets in 12 states, mainly in the Northwest. DCH has 14 dealerships in Southern California and 13 in New York and New Jersey, all in larger metropolitan markets. 

Lithia's ability to snap up a group as large as DCH sends a message to potential sellers, brokers said. 

"It may prompt owners of other large dealership groups, who don't have a succession plan, to think: 'Maybe I can do a transaction similar to this,'" said Alan Haig, president of Haig Partners in Fort Lauderdale, Fla. "We will see more sales of groups in 2014 and beyond than we've seen in years because buyers are confident, they have access to capital, and many owners are near retirement age and the businesses are too big to pass on to successors." 

Indeed, Liang said DCH wanted to sell in part because its private shareholders, who have grown older, wanted some "liquidity options." DCH is owned by families in the United States and Hong Kong.

Difficult to do

The number of sellers coming to market has been increasing weekly, said Erin Kerrigan, founder of brokerage firm Kerrigan Advisors in Irvine, Calif.

"I expect both big and small deal activity will continue to grow over the next 12 months," Kerrigan wrote in an e-mail. "That said, very large deals, such as the DCH transaction, are still difficult to get done due to the limitations of framework agreements and the small number of approvable buyers capable of completing a transaction of this size."

Framework agreements between automakers and their franchised dealers outline the terms and conditions for a number of issues. Automakers can block some dealership acquisitions under those agreements, say, if the proposed buyer would acquire too many stores of a given brand or have too large a share of the brand's national sales.

Lithia was an ideal buyer of DCH because there was so little overlap in the two groups' brands. Import brands, including Honda and Toyota but excluding luxury brands such as Lexus and BMW, make up 80 percent of DCH's sales but only 38 percent of Lithia's. Detroit 3 brands make up 51 percent of Lithia's sales but only 2 percent of DCH's.

Amy Wilson contributed to this report.

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