Private buyers snapping up stores
M&A action is up, but price disputes stall many deals
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Nearing retirement age with sons who weren't interested in the car business, Ron Charapp felt ready to sell his Pittsburgh-area dealerships in 2009. But he held off as dealership values plummeted and the pool of active buyers dried up during the recession.
Three years later, times have changed. Last month Charapp sold his Ford and Chrysler-Dodge-Jeep-Ram stores in Natrona Heights, Pa., to #1 Cochran, the largest dealership group in western Pennsylvania.
"It looked like the market was right, and the potential for a sale was certainly more advantageous for me at this point," said Charapp, 64, who declined to reveal terms of the deal.
Charapp is one of many sellers benefiting from the better environment. But despite more optimism in 2012, the dealership mergers and acquisitions market hasn't taken off the way many experts predicted. Through the first half of the year, acquisitions of U.S. dealerships by the public retailers ran at less than half the pace of 2011. Private-cap buyers appear to be more active, but disagreements over pricing, particularly real estate valuations, make those deals harder to close.
"Private groups are where the action is," said Sheldon Sandler, CEO of Bel Air Partners, a dealership advisory firm in Hopewell, N.J. "But they're very tough-minded. They want to buy deals, but they don't want to be overpayers, either."
At the beginning of 2012, Sandler and other dealership advisers projected that pent-up demand and improving vehicle sales would vault dealership acquisitions to levels not seen since before the recession began in 2008. Bel Air just completed its second deal of the year, equal to its total of all last year, and several others are in the works. But while activity has heated up, it's still not at expected levels, Sandler said.
Alan Haig, head of automotive services for Presidio Group of San Francisco, had projected acquisition activity by the public companies to rise at least 20 percent this year. So he is surprised that through June the publics collectively spent just $103 million buying U.S. dealerships, down 55 percent from $229 million in the same period in 2011. Furthermore, the big private buyers that Presidio talks with also express caution, Haig said.
Uncertainty looms
Since its last report in March, Presidio has lowered its estimates of blue sky multiples on several brands, such as BMW, Mercedes-Benz, Toyota, Nissan, Ford, Chevrolet and Chrysler-Jeep-Dodge. Blue sky is the intangible value of a franchise, on top of the bricks-and-mortar value, and is expressed as a multiple of adjusted pretax income.
"Buyers want to invest, but they see risk in the marketplace," Haig said. "Unemployment is ticking upward; a number of countries in Europe are entering a double-dip recession; there is a lot of economic and political uncertainty here in the U.S. There is no guarantee that if you buy something now that it's going to perform well in the future."
Those same uncertainties ultimately could bring more sellers into the marketplace. Many dealers nearing retirement age have continued to sit on the sidelines, dealership advisers say, because they enjoy record profits today and expect interest from buyers to continue to strengthen.
Mark Johnson, a buy-sell adviser in Seattle, says he's seeing the strength. "We are buried and have a half-dozen deals in process now, all scheduled to close by year end," Johnson said. Another three deals have been finished. The buyers in all cases are private.
The pace is about what Johnson expected for the year. "We're working with a lot of large private acquirers who have all kinds of ability and financing and appetite," he said.
Public interest
Five of the six public retailers -- all but Sonic Automotive Inc. -- say they continue to pursue acquisitions actively. But pointing to a continued price gap between buyers and sellers, several public company leaders acknowledge deals for U.S. stores have slowed this year.
While retailers are making more money and are optimistic about the future, they still face demands for dealership improvements from manufacturers, noted Michael Maroone, COO of AutoNation Inc., the country's largest retailer.
"The stalemate doesn't appear to be broken," Maroone said. "But we are talking to people across the country. There are opportunities. It's just about finding the right price-value combination for both ourselves and the sellers."
AutoNation made its last acquisition in early 2011.
Asbury Automotive Group walked away from two potential acquisitions in the second quarter because the price was too high, CEO Craig Monaghan told Automotive News. Asbury is interested in a couple other acquisition targets now.
"Hopefully, some of these that we're looking at now will prove out," Monaghan said. "But if the prices get out of line, we'll walk."
Group 1 Automotive Inc., which bought several dealerships in early 2012, is taking an "unintentional pause" in buying more stores because of that pricing gap, CEO Earl Hesterberg said.
The slowdown is disappointing, Hesterberg said: "We just aren't able to find too much at the moment."
Cheaper options
Instead of buying U.S. stores, public companies are using their cash in other ways for better anticipated returns such as buying abroad, paying down debt or buying back stock, Haig said.
Group 1 and Penske Automotive Group have spent $202 million so far this year on overseas acquisitions, Presidio said, almost twice as much as all six publics have spent in the United States.
Dealership prices in international markets are "significantly lower," Penske CEO Roger Penske said last month. Acquisitions fall in third place in terms of the retailer's capital allocation priorities, he said.
The publics largely aren't serious about acquiring stores unless they can buy for bottom-of-the-barrel prices, dealership adviser Johnson says. Lithia Motors Inc. is the only public company that has contacted him in the past 18 months.
For Lithia, which seeks to buy stores in small to medium-sized markets, acquisition activity looks "more robust" than at the start of the year, CEO Bryan DeBoer said.
"It's being driven by the uncertainty in taxes, that the capital gains rate might change by the end of the year" DeBoer said. "So there's a lot of people coming to us."
Regional group growth
More sellers entering the market will provide opportunities for regional groups such as #1 Cochran, of Monroeville, Pa.
Buying Charapp's Pittsburgh-area stores increased the group's count to 19 dealerships. The matchmaker in the deal was a CPA firm used by both Cochran and Charapp. Charapp was represented in the transaction by Mike Charapp, a Virginia dealer lawyer and Ron Charapp's first cousin.
For #1 Cochran, the acquisition adds $50 million in estimated revenue to the group's $450 million in annual revenue, said CEO Rob Cochran. It also gives the group its first Ford and Chrysler stores and an outpost on the northeast side of metropolitan Pittsburgh.
Cochran aims to diversify his group further in terms of brands and location. Top brands still missing from the portfolio are Chevrolet, Toyota and Honda. Cochran wants to stick to western Pennsylvania.
Said Cochran: "Where our brand is well known is where we would consider looking at other things."
Jamie LaReau contributed to this report
• Disagreements about price
•Difficulty determining the value of real estate
• Manufacturers' pressure to renovate stores
• Buyers' concern about high rent for renovated dealerships
• Financing can be difficult on small deals
• Public groups see other uses for capital, such as share buybacks
Source: Dealership advisers, public retailers
You can reach Amy Wilson at awilson@crain.com.
