Dealership buy-sell activity plummeted in the first quarter from year-earlier levels. But buy-sell advisers are confident sales will rebound.
Amid softer new-vehicle sales, dealership prices are slowly declining, buy-sell advisers say. Lower prices and tax reform could bump up the volume of deals by year end, they add, noting that public and private auto retailers as well as outside investors continue to look for deals. In addition, publicly owned retailers have more cash on hand after sharply curtailing stock buybacks.
"Buyers continue to be excited about auto retail so values remain strong for attractive deals, although they are increasingly picky and over-priced deals get little interest," wrote Alan Haig, president of Haig Partners in Fort Lauderdale, Fla., in his quarterly Haig Report.
"The first quarter of last year was a particularly big quarter, and this quarter was weak," Haig told Automotive News. "From our own experience, there's a lot going on. Lithia bought a deal, and there are other deals being done that are not in this quarter's data but we know are coming."
Lithia Motors Inc., of Medford, Ore., purchased Baierl Auto Group in Pittsburgh this month.
Still, Haig predicted this year's volume of deals will be slightly down from 2016 because "we're already in a bit of a hole."
But he added, "I feel confident that subsequent quarters will be better than Q1."
The total number of U.S. dealerships bought by public and private buyers fell 29 percent to 80 rooftops in the first quarter, said Haig, citing The Banks Report, in his report to be released today, May 29.
Haig said the U.S. presidential election may have delayed some deals in the first quarter, as both buyers and sellers waited to see whether there would be a quick revision to tax rules.
"Another potential explanation is that buyers are increasingly concerned about future profits and sellers are not willing to accept the prices being offered," Haig wrote. He wrote that the buy-sell market has "passed the peak" in blue-sky values unless there is "a significant tax cut" that would benefit sellers.
He also noted a growing "realization on the part of many sellers that they will have to accept their current offers or retain the dealerships for at least several years more until they increase in value again."
Buy-sell adviser Erin Kerrigan, managing director of Kerrigan Advisors in Irvine, Calif., is more optimistic. She wrote in her quarterly Blue Sky Report to be released this week that 2017 "is tracking towards 240 transactions for the year and pacing ahead of 2015's record level."
Kerrigan noted that the six public retail groups slashed their spending on stock buybacks 95 percent to $36 million from a year earlier, when their stock prices were at an all-time low.
That gives her hope the publics will return to store acquisitions.
"With their stock price being up, they are choosing not to buy their stock and they're increasing their cash reserves," Kerrigan told Automotive News.
"They are either considering acquisitions again or they're preparing for other expansion beyond U.S. acquisitions or, worst case, they are shoring up cash reserves if they think the industry sales are turning."
Haig is more cautious about public groups as buyers, noting that Lithia has been the only public retailer with a "pure play" on acquiring more stores.
For example, he noted that AutoNation Inc. has limited its buy-sell activity while stepping up spending on the rollout of stand-alone used-car stores.
"While the amount of spending by publics on acquisitions of all kinds in the U.S. increased in Q1, much of the increase was in stand-alone used-car stores and collision centers," wrote Haig.
The public retailers shifted money into capital expenditures, spending $253 million vs. $209 million a year earlier, Kerrigan wrote.
Likewise, in "other" acquisitions, which include used-car platforms, foreign acquisitions and collision centers, spending rose to $163 million from $51 million a year ago, Kerrigan wrote.
In total, public retailers spent $729 million in the quarter on domestic acquisitions, stock buybacks, dividends, capital expenditures and other acquisitions, down 47 percent from a year earlier, Kerrigan's report said.
They ended the quarter with $203 million in cash, up from $144 million a year earlier and $119 million at the end the fourth quarter.
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