Record dealership profits ease sting of high prices

Blue sky high, acquisition action is, too

Record dealership profits ease sting of high prices

Serra: “Out there playing”
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Dealer Joe Serra hasn't seen dealership price tags this high before. But it doesn't scare him away from seeking acquisitions for his 34-store group.

After all, dealership profits are at record highs, too, and Serra's aim is growth.

"I'm not sitting on the sidelines waiting for it to change," Serra, president of Serra Automotive Inc. in Grand Blanc, Mich., said of store pricing. "I'm just out there playing."

Serra, other buyers and dealership advisers agree that it's a seller's market. Dealership values are at record highs when measured on a pure dollar basis, they say. Still, acquisition activity is robust as the market continues to attract buyers with long-term views. The earlier they can buy before the next downturn, the sooner they'll earn profits and pay down acquisition costs.

"I see buyers moving faster than they did three years ago," said Alan Haig, president of Haig Partners, a dealership buy/sell advisory firm in Fort Lauderdale, Fla. "There's more confidence on the part of the buyers and more willingness to write a big check to get the dealership they want."

Haig says dealerships' values are at all-time highs. As part of its year-end 2013 Blue Sky Report on the dealership acquisitions market, which was scheduled to come out this week, Haig Partners estimated the average U.S. dealership had a value of about $4 million in blue sky for 2013, up from $3.6 million in 2012. Blue sky is the intangible value of a dealership above and beyond its hard assets.

That $4 million figure was determined by taking Haig Partners' estimate of the industry's average blue sky, expressed as a multiple of adjusted pretax income, of 4.3 for 2013, and multiplying it by the National Automobile Dealers Association's average dealership net pretax profit. The latter was $923,248 for 2013, the industry's third straight record year for net pretax profits, NADA data show.

Though the average value may be around $4 million, Haig notes that larger dealerships in metro areas are typically worth much more. He has been involved in recent sales with blue sky values in the $20 million to $30 million-plus ranges -- or even over $50 million for a single store with a high-demand brand and location.

Buyers will continue to pay high prices as long as they believe the future looks rosy and have confidence in the economy, dealership advisers said.

Public retailers and many large private capital groups are actively looking for stores. In 2013, the publics collectively spent just more than $1 billion on acquisitions, a 45 percent increase from 2012 and the first time their spending topped $1 billion since 2004, according to Haig Partners.

About 43 percent of their 2013 spending was on international acquisitions. Two of the publics, Penske Automotive Group Inc. and Group 1 Automotive Inc., have diversified overseas as profitable opportunities have emerged abroad. In early 2013, for instance, Group 1 bought an 18-store group in Brazil.

In the United States, the gap between asking prices and what buyers are willing to pay is narrowing as dealerships generate higher profits, AutoNation Inc. COO Michael Maroone said. "We're closer [on pricing], and I think you'll see some deals get done in the back half of the year," he said.

AutoNation, the country's largest dealership group, was responsible for $88 million of the publics' 2013 spend, according to Haig Partners.

Sid Tobiason, tax partner for the automotive services group at accounting firm Moss Adams in San Diego, said buyers are largely being sensible in evaluating deals. Prior to the recession, Tobiason said, he saw some transactions involving a preferred location or franchise where the revenue levels would never support the purchase price.

Though today's activity level is higher than he has ever experienced, "I haven't seen any of those bubble-type pricing deals," Tobiason said. Because buyers don't want to overpay, they do more financial analysis of a deal than in prior years.

"From a buyer's standpoint, the biggest concern is that pricing is getting to the point where the opportunities aren't easy," said Tobiason, who counts buy/sell transactions as a third of his practice. "They have to evaluate things and be very comfortable that a purchase is a solid purchase."

That's a priority for Luther Automotive Group of Minneapolis, which is actively looking for acquisitions, particularly in the Sun Belt, said John Buelow, Luther's director of corporate development. The 30-store group is close to completing what would be its first deal outside of the Upper Midwest.

Prices can be higher in southern markets, Buelow said, and the possibility that Luther may be buying at record highs makes him pause.

"As you look at the absolute dollar amount, the numbers have gone up substantially in the last 10 years, so you need to have more capital, more credit facilities," he said. "From a pure return on investment, in a rising tide all boats rise, so it's relative. We want to try to get our return and get our money back out from a blue sky point of view within five years."

Luther is not scared of buying during a seller's market, Buelow said. There is likely time in the current cycle to pay off the blue sky investment while vehicle sales are still strong. But that boosts Luther's preference for stores that are underperforming, even slightly, so it has a chance to recoup its investment faster.

Serra also is focused on the upside. This year Serra Automotive bought a large Chevrolet-Buick-GMC store in suburban Nashville. In 2013 the group bought Honda and BMW stores in Champaign, Ill.

Because of the cyclical nature of the business, Serra doesn't have a hard target for how many years it will take to recoup his investment.

"I've got to buy it, knowing I'm in it for the long haul," Serra said. "It's not going to be easy but it's what we know, it's all we know, it's what we love doing, so that's why we're looking to grow."

You can reach Amy Wilson at awilson@crain.com.


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