UPDATED: 6/16/14 4:20 pm ET -- adds closing stock price
Lithia Motors Inc. has agreed to buy DCH Auto Group, the companies said Sunday, in a combination that would create the fifth-largest U.S. auto retailer by store count.
The deal will help Lithia, of Medford, Ore., pursue its goal of expanding to the eastern United States. Lithia, in a statement, said it would pay about $340 million in cash and another $22.5 million in Lithia stock to make the acquisition, expected to close in the fourth quarter.
On Wall Street today, Lithia shares rose 13 percent, or $9.85, to close at $86.53 a share on the New York Stock Exchange.
"We were already sharing best practices," said Lithia CEO Bryan DeBoer in an interview with Automotive News on Sunday. "We got along so well, we thought we may be better together than apart. We have liquidity needs for our shareholders. And we were looking for a great management team that we could work with in the East."
DeBoer said because the two companies' executive teams are familiar with each other, integration of the two cultures should be seamless.
Lithia has 101 stores in 12 states, mainly in the western United States, but also in the Midwest and Texas. DCH has 27 dealerships: 14 in southern California and 13 in New York and its home state of New Jersey.
Until now, Lithia’s strategy has been to focus on exclusive franchise dealerships in small- to medium-size markets, while DCH has focused on large metro markets.
Earlier Sunday, DeBoer said in a statement, “For the past several years, we have been seeking a strategic partner to help us to enter the eastern United States. The DCH organization is an ideal fit with our existing team. We share similar strategic goals and core values, and have complementary strengths.”
He added, “Together, the organization will be able to grow in multiple markets, learn from each other, and deliver improved efficiencies due to scale.”
DeBoer told Automotive News that DCH provides Lithia with a volume business model, while Lithia adds other efficiencies to DCH's business. For example, DCH sells about 65,000 new and used vehicles a year, he said.
Had DCH shared their sales and revenue data, they would have ranked tenth on Automotive News' top 125 U.S. dealership groups, DeBoer said.
"We know over the next two to five years, as we get to know each other better, we'll find the strengths and weaknesses that we each offer," he said.
DeBoer said there will be branding changes as a result of the merger, but he does hope to see added efficiency in operational costs and improved used-vehicle sales.
DCH name stays
George Liang, DCH president, said in a statement that under the terms of the agreement between the companies, “DCH dealerships will maintain the DCH name and continue to leverage the high quality DCH brand, including its commitment to ‘The DCH Way’ and promoting teen safe driving. Lithia and DCH will maintain their current management teams, and going forward will work in tandem to lead and support their respective markets.”
Liang will report directly to DeBoer.
After the transaction is completed, the companies said, DCH founder Shau-wai Lam is expected to join Lithia’s board of directors.
The combined group will have estimated annual revenue of about $7 billion, Lithia said in a slide presentation on its Web site. About 20 percent of its revenue will be generated in the eastern United States.
Brand mix changes
The combination will radically reshape the mix of brands that Lithia sells.
Currently, 51 percent of Lithia’s sales are domestic brands, while 80 percent of DCH’s sales are imports.
The two companies’ combined sales are expected to be 56 percent imports, led by 26 percent from Honda and 21 percent from Toyota. Domestic brands will make up 30 percent of sales, led by 18 percent from Chrysler Group, and luxury brands will make up the remaining 14 percent.
Publicly held Lithia ranks No. 8 on the Automotive News list of the top 125 dealership groups based in the United States, with retail sales of 67,177 new units in 2013. It sells 28 brands.
Privately held DCH, of South Amboy, N.J., hasn’t provided the information that would allow it to be ranked on the list.
The Lithia-DCH total of 128 dealerships would rank behind AutoNation Inc.’s 228, Penske Automotive Group Inc.’s 243, Group 1 Automotive Inc.’s 148, and CarMax Inc.’s 131, according to the Automotive News Data Center.
Lithia said the DCH stores are estimated to generate approximately $2.3 billion in annualized revenue.
The transaction is expected to be funded through the expansion of Lithia’s existing credit facility by $600 million, mortgage financing of $200 million, and available cash flows from operations. It is targeted to close in the fourth quarter of 2014, and is subject to what Lithia called “customary approval conditions.”
Jamie LaReau contributed to this report.