THE NEW BUYERS

Dealerships' resiliency, margins look good to nonindustry investors

Financial services exec Bob Stallings wanted to diversify his investments.
ON THE RECORD
Excerpts from our interviews with Bob Stallings and Eric Chelline.
 
Stalling discusses his childhood introduction to the auto business.
 
In these two segments, Stallings discusses owning race teams and how this benefits his knowledge of the car business.
 
Stallings talks about his motivation to enter the car business and how he defines success.
 
Stallings describes an early experience dealing with a customer. This clip has been edited for clarity.
 
Chelline on how the archetypical bootstrapping dealer is not common anymore.
 
Chelline on being a “frustrated, wannabe dealer.”
 
Chelline on how he views capital investments and the ultimate goal of them.
 
In these three segments, Chelline speaks to why automotive retail is an attractive business option. These clips have been edited for length and clarity.
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Dallas dealer Bob Stallings started spending time on car lots when he was 8 years old, helping his father buy cars. But he didn't become a dealer by the old-fashioned way of taking over a family store.

Instead, Stallings made his money -- a lot of it -- in financial services even as he kept his eyes on the car business and formed his own racing team. When the insurance holding company he leads sought to invest excess capital, Stallings came back to the car lot.

"We have been looking for ways to diversify our investment strategy," said Stallings, 65 . "I've had a passion for cars for a very, very long time."

Two years ago, Stallings started looking for dealerships to buy. His company, Gainsco Inc., acquired a Hyundai store in Dallas in November and aims to invest $100 million in dealerships over the next five years. He's looked at more than 30 deals and is negotiating to buy three more Texas stores.

Stallings is one example of how outside money is gravitating to auto retailing, which proved its resilience by emerging from the industry sales crash more profitable than ever. An increasing number of outsiders are buying stores, gathering up cash and looking to invest in dealerships. They include wealthy families, private equity firms and even public companies such as Gainsco.

Most deals still happen dealer to dealer, but outside buyers can be an increasingly good fit for sellers, dealership advisers say. They sometimes will pay a premium and often prefer to retain store management. Manufacturers also are becoming more open to outside investors, provided they have a long-term outlook.

The new investors largely seem to have just that view.

Eric Chelline: $300M to spend

Long-term view


Outsiders typically look for a return on investment that tops 15 percent, maybe even 20 percent, experts say. Alan Haig, president of Haig Partners, a dealership buy-sell advisory firm in Fort Lauderdale, Fla., says few other investment classes offer the return and ability to survive a recession that dealerships do.

Dealer advisers say they are seeing more interest particularly from family offices, the investment arms for wealthy families.

Rick Kotzen, a partner in accounting firm Crowe Horwath's automotive practice, has met with private equity groups and family funds that are shopping for dealerships or investigating the industry's potential.

Activity with family funds particularly has picked up in the last 18 to 24 months, he says.

"The numbers are growing, and, to a certain extent, Wall Street is just finding out that these car dealerships are creating tremendous wealth," said Kotzen, who specializes in due diligence work on acquisitions.

Outside investors aren't new. Hedge fund giant Edward Lampert and Microsoft Corp. founder Bill Gates have large stakes in AutoNation Inc., the nation's largest dealership group. RLJ Cos., led by Robert Johnson, the founder of Black Entertainment Television, has the majority stake in RML Automotive, formerly called RLJ McLarty Landers Automotive.

One of the best-known examples of a wealthy family buying dealerships is the Pohlad brothers of Minnesota, who also own the Minnesota Twins baseball team. The sons of self-made billionaire Carl Pohlad bought their first dealership in 2008 and now operate 11 through their Twin Cities Automotive.

Robert Pohlad told Automotive News last year that his family pursued auto retail because it's "a proven industry with strong brands."

Two dealership groups among the most active acquirers in recent years are expanding with the help of outside money.

Ken Garff Automotive Group in Salt Lake City has grown to 46 stores with the backing of Leucadia National Corp., a public investment company often described as a mini version of Warren Buffet's Berkshire Hathaway. Leucadia and Garff own 21 dealerships through a joint venture and continue to look for acquisition opportunities.

Prime Motor Group in New England is up to 21 stores with the backing of Abrams Capital, a private equity firm in Boston. Longtime dealer David Rosenberg, who runs Prime, met Abrams founder David Abrams more than a decade ago in a networking group.

After selling his family's dealerships to Group 1 Automotive in 2000, Rosenberg ran Group 1's platform in the region. When Group 1 moved to centralize its operations in 2006, reducing regional autonomy, Abrams offered to back a new dealership venture. "Rather than buy a couple of dealerships with my own money, I invested along with him, and we bought a bunch of dealerships with a lot of money," Rosenberg said.

Abrams is making a long-term investment, outside of any fund structure, and has no plan to exit the venture, Rosenberg said. Prime continues to seek acquisitions.

"Wall Street is just finding out that these car dealerships are creating tremendous wealth."
Rick Kotzen, partner, Crowe Horwath automotive practice

Big money available


There's big money at stake. Dealership advisers say interested outsiders have hundreds of millions of dollars, even as much as $1 billion in some cases, that they could deploy.

Open Road Capital is a case in point. The private equity firm in Washington, D.C., hasn't completed any deals yet but is prepared to invest up to $300 million during the next few years, says Eric Chelline, an Open Road founder who worked at dealerships for 10 years before going to business school.

"It's a great industry to invest in, and the returns can be good," Chelline said. "It's a resilient business."

Chelline and Open Road co-founder Tim Batchelor are looking at four possible investments. The firm aims to partner with dealership operators -- the general manager of a store or the COO of a group, for instance -- to acquire properties that the operators likely could not afford to buy on their own.

They aren't interested in flipping dealerships, and they have no hard date on when to exit.

For potential sellers, the rise of outside investors presents another viable option for exit. It may prove especially important for large, high-value dealership groups, advisers say. Acquiring such groups can be a challenge for public and the largest private-cap retailers because of restrictions in their framework agreements with manufacturers.

Such deals are expensive. Single stores can be worth tens of millions of dollars, while some groups are worth hundreds of millions of dollars.

"This is rare air," said Todd Berko, managing director of Bel Air Partners in Hopewell, N.J. "Therefore, well-heeled buyers who aren't in the car business become very, very important."

Bel Air is working with several family offices looking to buy dealerships, Berko says.

Finessing the deal


Transactions with outside buyers can take longer and be more difficult to close. Outsiders are learning about the industry and can take longer to say yes than another dealer, who might be willing to scratch out a deal on a napkin over coffee. It also can take longer for a manufacturer to approve a deal with a nontraditional buyer. The key for manufacturers is that the buyer has a long-term outlook and proven store operators, advisers say.

Gainsco's Stallings tries to learn something new about running a dealership every day. He often reads Customers for Life, the customer service bible by fellow Dallas dealer Carl Sewell. He owns three copies and keeps one in his car.

Stallings spends time each day and most nights until closing at his Hyundai store. He's come a long way since those childhood visits to dealerships to help speak for his father, who was deaf and mute and liked to trade cars every few months. For Stallings, who grew up poor and moved frequently around the country, the lessons from those often-tense negotiations are proving valuable today.

"It is a very important goal of mine to make the car-buying experience more fun," Stallings said. "Organizations who can bring a lot of training, processes, technology and maybe a little bit more sophistication to the business while hanging on to a good value system and a respect for their customers are clearly going to do well." c

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


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