Despite soaring stock prices for three public dealership groups, dealership values have declined over the past year.
Transaction prices are still higher than they were when the public dealership groups went on a buying spree two years ago. Before the public chains stepped on the gas, the strongest dealerships sold for three times pre-tax earnings. Today's price range for profitable metropolitan dealerships is about four to six times pretax earnings - though sale prices are closer to the low end of the range.
Analysts say dealerships are selling for 5 percent to 20 percent less than they were about a year ago.
'In 1997 it was an absolute (buy-ing) frenzy,' says Brodie Cobb, managing director of Presidio Strategies, a San Francisco investment firm that serves dealers. 'Now there is more discipline and order.'
Stock prices influence the prices paid for private dealerships, and Group 1 Automotive Inc., Lithia Motors Inc. and Sonic Automotive Inc. are trading well above their initial public offering prices.
But several factors have eroded dealership valuations, including:
The sharp drop in Republic Industries Inc.'s stock price.
The impact of tuck-in dealerships and smaller acquisitions.
The flood of dealers eager to sell out.
'The anemic performance of some of the public groups (including Republic) has caused the marketplace to get more realistic about prices,' says Ralph Mulkey, president of Ben Hicks and Associates, a dealership broker based in Grand Prairie, Texas.
Republic, by far the nation's largest dealership group, with more than 250 dealerships and almost 400 franchises, has seen its stock price drop to about half of its 52-week peak. Republic's stock currently trades for about $15 per share, compared with a 52-week high of $30.
The deflated stock price has forced Republic to pay cash for dealerships, which reduces the transaction price.
'You have to offer a dealer more money when you pay in stock instead of cash because there is more risk' in taking stock, says a source close to Republic.
The Fort Lauderdale, Fla.-based chain would not comment on dealership prices. But the source close to Republic says the average transaction price is about 20 percent less since Republic started paying cash for dealerships in the second half of last year.
In general, Republic has paid higher prices for dealerships than other public groups and large dealership chains because it targets 'trophy' stores, the highly profitable, high-volume dealers in large metropolitan markets.
When it began gobbling up chains two years ago, Republic was paying as much as 10 times after-tax earnings. Just before it started cash acquisitions, Republic paid eight to nine times after-tax earnings. Now the company is paying six to eight times after-tax earnings, including the equity in real estate and other hard assets, the source estimates.
Republic is the most active bidder for dealerships, so its transactions influence other buyers. 'Republic's inability to pay with stock has made people more conservative,' says Sheldon Sandler, CEO of Bel Air Partners, a Princeton, N.J., investment firm that serves dealers, including Republic.
Small players scared
Analysts say there is now a buyer's market for car dealerships -even though more big, moneyed players are on the acquisition trail. Eleven public companies now own new-car dealerships. And General Motors and Ford Motor Co. have entered the arena. Ford is said to pay some of the same hefty prices as Republic does to lure dealers into its Ford Retail Network.
The big players have scared some smaller private buyers out of the market. 'Almost any private individual would be petrified to compete with the public groups,' says the source close to Republic.
And the high prices paid for large metro dealerships - particularly 18 months to two years ago - has enticed many dealers to court the consolidators. Consolidators are public chains and large, high-growth private dealership groups.
'There are so many dealers approaching the consolidators to sell,' says Sandler. 'Because of the law of supply and demand, prices are going down.'
Those dealers not attracted by high prices could be getting a nudge from their manufacturers to move on. Most of the manufacturers plan to retrench their retail networks, and they are urging dealers to sell, Sandler says.
Not only are there fewer chains going after more dealerships, but the players have a better feel for what dealerships are worth. The prices were higher in the beginning because the early consolidators didn't know what to bid.
'I think we have defined who the buyers are. Many of those buyers have established themselves as credible companies in the marketplace,' says Cobb. 'When you don't know who your competitors are, you run as hard as you can and as fast as you can.'
The consolidators also have begun to buy smaller dealerships that do not command the high prices of trophy stores.
Lithia's strategy has always been to pay bargain prices for dealerships that could stand some improvement. But Sonic and Group 1 also buy smaller, less profitable dealerships in metro areas after buying out a stellar dealer in the same area. The strategy allows the chains room for internal growth, in addition to gains from acquisitions.
'They (Group 1, Lithia and Sonic) don't want to pay astronomical prices for stores that don't have high profits,' says Dave Jarrett, partner in charge of the dealership services group for accounting firm Crowe Chizek in Chicago.
All the consolidators have started to buy what is known as 'tuck-in' dealerships. Tuck-ins are smaller dealerships that are neighbors of the large trophy stores. The large chains use these acquisitions to fill in their markets and generate economies of scale.
The consolidators have made their initial splash snapping up many of the trophies. The pace of acquisitions has slowed and become more disciplined. Analysts say there will be fewer purchases of high-volume, profitable stores that drive up prices.
Donna Harris is an Automotive News staff reporter based in Washington, D.C.