Dealership buy/sell activity increased 60% in the first quarter of the year (see Chart 1). The increase is attributed to a rise in the number of sellers entering the market. Buyers, both public and private, have reported an increase in the number of acquisition opportunities being brought to them. Interestingly, the rise in sellers has yet to have a negative impact on blue sky pricing, which remains very high.
Public Acquisition Activity Q1 2014
The publics’ increased their spending on dealership acquisitions in the first quarter of 2014 as compared to 2013, growing their total U.S. and international acquisition spending by 40%. However, their spending on U.S. dealerships increased by just $8 million in the first quarter, a meager 9% improvement over the first quarter of 2013. The $96 million spent on U.S. acquisitions in the first quarter was for just eight dealerships. This spending level is still much lower than pre-recession levels. In fact, the publics have even sold a few dealerships over the last 12 months. International spending continues to garner a significant share of the publics’ acquisition capital, 22% in the first quarter.
I continue to be surprised by the lower than expected acquisition activity by the publics, particularly given their record access to capital for acquisitions (see Chart 3). As you can see in Charts 4 and 5, in the first quarter of 2014 the publics reduced their capital allocation to dealership acquisitions and significantly increased their allocation to stock buybacks. Collectively, the public spent $163 million on stock buybacks in the first quarter, 70% more than what they spent on U.S. dealership acquisitions. For example, AutoNation, the largest of the publics, acquired $116 million of its own stock in the first quarter and made no acquisitions. In effect, AutoNation chose to invest in their own dealerships, rather buying new ones.
The increase in public stock buybacks may reflect a recent decline in the P/E multiples of these stocks. The publics’ average P/E multiple has declined from a high of 22.2 in January 2010 to 16.1 in January 2014 to 15.1 in March 2014. At a lower multiple of earnings, the publics’ stock becomes an increasingly attractive investment, particularly if there are few dealerships available for purchase that meet their framework agreement requirements or that are accretive to their earnings.
Private Dealership Acquisition Activity Q1 2014
As compared to the publics, private dealership groups continue to be the most acquisitive. According to The Banks Report and our research, there were 48 dealership acquisitions in the first quarter of 2014. Private dealership groups made 40 acquisitions, representing 83% of the buyers, up from 78% in 2013.
The dominance of the private acquirers is reflected in the increasing number of private dealership groups with greater than $1 billion in sales, rising from just 11 in 2009 to 36 in 2013, a 227% increase (see Chart 7). The majority of these companies’ revenue growth has come from acquisitions, not same store sales.
I expect private buyers to be the driving force of future dealership consolidation for three main reasons, listed below.
In closing, I am always surprised how focused many private dealers are on the publics. Dealers often assume a public is the most likely acquirer of their stores. And yet, the public companies own just 5% of the 17,875 dealerships in the US. 95% of dealerships are still owned by private companies. While the publics’ generally have greater access to capital, they also have more options for that capital and more manufacturer limitations on their acquisition strategy. As such, they are less active in the buy/sell market and less likely to be the buyer of your dealerships. Of course, if a new public emerges, that would be a different story. To be clear, that is a big “if”. Until then, I expect we will continue to see private groups lead dealership consolidation.