Blue sky pricing remains very high as pricing floor forms; more sellers enter market; privates dominate, while public spend rises 9% year-over-year, according to The Kerrigan Quarterly Blue Sky Report

IRVINE, Calif., Jun 23, 2014 (BUSINESS WIRE) -- U.S. dealership buy/sell activity dramatically increased in the first quarter of 2014, according to The Kerrigan Quarterly Blue Sky Report for Q1 2014, which was released today by Kerrigan Advisors. The report is the auto industry's most comprehensive and authoritative quarterly report and analysis of dealership buy/sell activity and franchise values.

Laying out the high, average and low multiples for each franchise in the luxury and non-luxury segments for the quarter, the report offers a detailed view of public and private company dealership acquisition activity. In addition to the sharp spike in selling, among the key findings in the report are that blue sky pricing remains high for most franchises and that the market has established a pricing floor.

“As anticipated, an increase in the number of sellers coming to market has led to a major uptick in buy/sell activity. We attribute this to high blue sky prices, buyer demand for dealerships and a slow-down in dealership profit growth, meaning sellers are concerned about missing the market and want to ensure they exit on top,” said Erin Kerrigan, founder and managing director of Kerrigan Advisors. “Private companies continued to dominate the market in Q1, although public company activity rose slightly during the quarter and will likely continue to pick up after the announcement of Lithia’s acquisition of DCH. The publics, however, are being very disciplined with their capital allocation. If they believe the better investment is their own stock, they are choosing a stock buyback over an acquisition. In the first quarter, collectively, they chose to spend 70% more on their own stock than on U.S. acquisitions.”

Report Highlights

• Buy/Sell activity increased 60% in the first quarter.
• More sellers coming to market to capitalize on high blue sky values that may fade as earning growth slows.
• Blue sky values remain at elevated levels as dealership earnings continue to grow, albeit more slowly; and multiples remain high or reach higher levels.
• The multiples for Honda, Toyota, BMW, Mercedes, Lexus and Porsche have increased since 2013. As competition for auto retail market share heats up, buyers are placing an even higher premium on these franchises.
• Pricing floor forming: with the average dealership earning an annual 28% return on equity, few dealers are willing to sell their franchises for less than a 3x blue sky multiple in today’s market.
• 48 dealerships were acquired in the first quarter of 2014, 40 of which were acquired by private dealership groups.
• Collectively, the publics spent 70% more on stock buybacks ($163 million spent) than on U.S. acquisitions ($96 million spent) in the first quarter.

“While the future continues to look rosy for dealership acquisitions, we will likely start to see some negative shifts as increasing competition for car sales brings blue sky winners and losers,” concluded Kerrigan.

The Kerrigan Quarterly Blue Sky Report, which is published four times a year, includes Kerrigan Advisors’ signature blue sky charts, multiples and analysis for each franchise in the luxury and non-luxury segments. The multiples are based on Kerrigan Advisors’ view of franchise values in the current buy/sell market and can be applied to adjusted pre-tax dealership earnings to estimate blue sky value. To download the report, click here.