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Profits, cash boost dealership M&A this year

"Red hot" is how George Karolis describes the current dealership buy-sell market.

Karolis is president of Presidio Group, an investment banking and dealership advisory firm in San Francisco, which has sold 37 dealerships this year worth more than $2 billion.

"We expect to exceed that number of dealerships-sold pace next year," he said. "It's just on fire. It's busier than we've ever seen," he said of the merger and acquisition market.

Dealership buy-sell activity soared in the third quarter as two public auto retailers spent more than $1.2 billion on acquisitions, and it is likely to continue at high — perhaps record — levels into 2021, buy-sell experts say.

"We think 2021's going to be more active than 2020, which says a lot, since 2020 is tracking to be a record year," said Erin Kerrigan, managing director of Kerrigan Advisors, a sell-side firm in Irvine, Calif.

Kerrigan Advisors' quarterly Blue Sky Report estimates 73 transactions — for both single and multiple stores — in the third quarter, up 26 percent. Activity shot up following coronavirus-related shutdowns this spring.

Her firm cites The Banks Report, Automotive News and its own research to report that 2020 transactions are tracking to reach 248, which would beat 2015's peak of 242.

In the fourth quarter, Kerrigan's company alone sold a record 22 dealerships, including several large, multi-store deals. Kerrigan expects to see more of those in 2021.

Sales by her firm in 2020 have generated more than $1 billion in proceeds to clients, she said.

Kerrigan said the market is particularly active because the average blue sky,or intangible value of a dealership, including goodwill, reached a record $6.9 million in the third quarter based on her firm's analysis. She also attributed the uptick in buy-sell transactions to plentiful financing and to dealership owners experiencing record profits, which provided cash for acquisitions.

The third-quarter Haig Report, published by the Fort Lauderdale, Fla., buy-sell firm Haig Partners, estimates 95 dealerships changed hands in the third quarter, up 9 percent.

Alan Haig, Haig Partners president, estimates the average blue sky value is up 10 percent from the end of 2019 to $7.4 million.Haig's firm posted a record by selling more than 31 dealerships so far this year, with another four-store group likely to close by the end of December, he said. He now expects another record buy-sell market in 2021.

"Dealership profits should be pretty rosy the next couple of years and that's going to drive a lot of" buy-sell deals, Haig said.

However, some dealers have expressed concern about how long tax rates, including capital gains taxes, will remain low, and have their eyes on the U.S. senate runoff election in Georgia in January as an indicator, buy-sell experts say.

Some dealers worry that a jump in capital gains or personal taxes would leave them with less cash for acquisitions, which could delay some dealers' decisions on selling stores since proceeds would be reduced.

Haig predicts income taxes will stay low for the next two years or longer. Even if Georgia's Democratic candidates win both seats in the runoffs, Haig believes it will still be hard for Congress to pass tax increases, as many will be facing reelection themselves in 2022.

Kerrigan said closing deals by the end of 2020 was a motivator for some sellers who wanted to take advantage of low rates in case they rise in the future."At this juncture it's such an unknown as to what will happen next year as it relates to taxes," she said. "But I'm not seeing it as part of the discussion for 2021."

Kerrigan, Haig and Karolis think the public auto retailers will remain active in the market next year.

Haig pegs spending by public companies already at record levels this year, totaling nearly $1.6 billion through the third quarter.

Lithia Motors Inc. bought17 dealerships through the third quarter, including 10 John Eagle Dealerships stores in Texas. Lithia has purchased 29 stores so far this year and has pledged to spend $4 billion annually on acquisitions over five years.

Asbury Automotive Group, which spent $735 million in the third quarter to buy eight Park Place Dealerships, said this month that it wants to double revenue in 2025, in part through $5 billion in acquisitions.

Group 1 Automotive also has said it is looking to grow, Kerrigan said.

"I don't think it's going to be possible for the other public companies to sit tight," Haig said. "I think this growth, this expansion from Lithia and Asbury, will likely create an urge in those [other public] companies to grow again."

Presidio Group's Karolis said there currently are more buyers than deals.

"The industry is doing well," he said. "The market's strong. Dealers are doing well and have proven their resilience. And buyers are abundant. So that makes for a pretty good market."

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