CAPITAL IDEAS

Largest public and private groups are sitting on hoards of cash

Haig: Private groups have $1 billion.
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Those in the buy-sell arena expect heavy activity over the next few years because most of the largest dealership groups, public and private, have amassed hoards of cash.

The dealership groups have largely completed facility upgrades and thus have less need to fund those projects than in the past. And for the public groups, high stock prices reduce the appeal of stock buybacks. That leaves spending the cash on acquisitions as a top choice, experts say.

Many dealership group leaders concur.

"We've got the capital, there's no question about that," Asbury Automotive Group Inc. CEO Craig Monaghan said. "We're certainly in a position where we can write a $100 million check or more and would be more than willing to do so if we can find the right opportunities."

In 2006, the top 20 private dealership groups had an estimated $719 million for various uses after taxes, says Alan Haig, president of dealership buy-sell advisory firm Haig Partners in Fort Lauderdale, Fla. By 2013, that had climbed to about $1.025 billion, he says -- a 43 percent increase.

"And with the private groups, they don't have to go back and buy back their stocks. They already own it," Haig says. "That's one less use of cash they have than publics."

In 2013, the public dealership groups had an estimated $1.35 billion of after-tax cash generated from their operations, up 115 percent from 2008, Haig says.

'Building cash'


Being rich in cash doesn't necessarily equate to massive bidding wars. Buyers still want to be sure an acquisition meets their criteria for a return on investment.

But one senior executive at a public dealership group says it has lowered its return-on-investment requirements for acquisitions and therefore likely will do more transactions than in the past, Haig says.

Low interest rates also are driving acquisitions. Not only do low rates make transactions more affordable, but companies can also get a stronger return on investment than if they kept cash in the bank, brokers say.

But the public dealership groups have framework agreements with automakers that limit how many of certain franchises they can own. Therefore, the public companies must alternate between buy-sell activity and stock buybacks, brokers say.

Although public groups are doing some stock buybacks, high share prices make that option unattractive, says Sheldon Sandler, founder of brokerage firm Bel Air Partners in Hopewell, N.J. For example, AutoNation Inc.'s stock price has ranged from $41.89 to $56.10 a share during the past 52 weeks. That compares with $15 to $19 a share in 2009 and 2010.

"They're just building cash, and they are going to have to make acquisitions," Sandler said.

That means some companies will have to step out of their comfort zones. That's especially clear for public companies, which are more inclined to openly discuss their strategies. One example is Penske Automotive Group Inc.

Biggest groups grow

Into new markets


"Penske has been buying individual dealerships that are integrated into a regional hub," Sandler said.

Penske will have to start buying in new markets "because it's the only way they can grow their earnings," Sandler said.

"Inevitably, to move the needle, they will have to go back and buy some bigger [groups of stores] again," he said.

But CEO Roger Penske says he considers profitability and scale when buying new businesses.

Penske Automotive ranks No. 2 on the Automotive News list of the top 125 dealership groups in the United States with retail sales of 199,795 new vehicles in 2013. The group ended the year with $386 million in available credit. Available credit is how it defines total liquidity, says Tony Pordon, Penske's spokesman.

Asbury is "wide open" to buying large groups of stores in new cities or single stores in existing markets, Monaghan said. Its executives are ahead of their planned acquisition pace and Asbury has $281 million in cash.

"We'll be able to get that program executed," Monaghan told Automotive News in February. "We just can't tell you when. We've got the capital." Asbury ranks No. 7 on the list with 86,685 new units retailed in 2013.

Group 1 Automotive Inc. acquired 38 dealerships last year. It plans to grow through strategic acquisitions more slowly this year. Most will be in the United States, CEO Earl Hesterberg said.

Group 1 ranks No. 3 on the list with retail sales of 155,866 new units last year.

Cash reserves
The 6 publicly owned new-car dealership groups have stockpiled cash since the market recovery, with much of it available for acquisitions.
 Available liquidioty (in millions)
 201320092008
AutoNation$974$390$400
Penske Automotive Group$386$311$311
Sonic Automotive$221$119$139
Group 1 Automotive$300$243$174
Asbury Automotive Group$281$207$207
Lithia Motors$319$74.2N/A
    
Note: Figures are year-end totals.
Source: Companies

Up in the air


Lithia Motors Inc. CEO Bryan DeBoer expects a "productive" year in acquisitions, and it's off to a good start.

This year, Lithia Motors acquired five dealerships and opened a new point. The six stores will deliver combined estimated annual revenues of $230 million.

But acquisitions aren't on the front burner at Sonic Automotive Inc. Executives are open to buying dealerships if a deal makes sense, but President Scott Smith says Sonic's leaders would look at either a large group of stores in a new market or individual stores in existing markets. There are no acquisition targets, in part because Sonic's focus is on rolling out its new customer experience initiative and launching stand-alone used-vehicle stores. Sonic had $221 million in cash and available credit at the end of 2013. It ranks No. 4 on the list with 132,363 new units retailed last year.

AutoNation can fund acquisitions if it opts to this year. It ended 2013 with $974 million in total liquidity.

The dealership group, which tops Automotive News' list with retail sales of 292,922 new units last year, has not set targets on buying stores. But CEO Mike Jackson said AutoNation has the resources to add as much as $2 billion in annual revenue through dealership acquisitions this year.

"Whether it will happen or not is another question," Jackson said. "It all depends on price and negotiation."

“We'll be able to get that [acquisition] program executed. We just can't tell you when. We've got the capital.”
Craig Monaghan, CEO, Asbury Automotive Group

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


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