With new financial backing and Roger Penske in charge, UnitedAuto Group hopes to start fulfilling some of the promise it showed when it went public a little over two years ago.
Some consolidators like UnitedAuto still must prove that besides acquiring dealerships, they are good at running them, too. Consolidators also were supposed to deliver economies of scale - a huge competitive advantage over smaller chains. Access to cheaper funds was supposed to be another big advantage.
Except for its successful initial public offering, which made millions for the original investors, New York-based UnitedAuto has failed to distinguish itself at any of those things. And those are precisely Penske's strengths:
Penske and his managers are renowned for their professionalism in auto retailing.
Penske Corp., a sprawling empire with $6 billion in annual revenues, is a good example of how the parts of a large enterprise can help one another make money.
Wall Street, bankers and car dealers seem to love Penske, and that should help UnitedAuto sell stock, get loans and buy dealerships.
Through an affiliate, New York-based Penske Capital Partners, Penke gets management control of UnitedAuto's 62 dealerships. Penske Capital Partners LLC is a joint venture formed in 1998 with Chase Capital Partners, GE Capital Services Equity Capital Group and Aon Corp., with a goal of acquiring $1 billion worth of assets in the transportation industry in three years.
A separate subsidiary, Penske Automotive Group, already is the No. 10 U.S. dealer group, with 1998 retail sales of 24,514 new cars and light trucks.
UnitedAuto was the No. 2 dealer group in 1998, with retail sales of 77,403 new cars and trucks.
'The roots of our business are the retail auto business. It is a business we enjoy, we have been doing it for many years, it is a business we are comfortable with, especially since it is a dealer-based business. We think there are great opportunities with United,' said Walter Czarnecki, executive vice president of parent Penske Corp.
At present, Penske does not plan to consolidate the publicly traded UnitedAuto with the privately owned Penske Automotive Group, Czarnecki said.
'Just what the doctor ordered,' was how First Union analyst Tom Thomson described the $145.5 million deal. Penske, 62, becomes chairman and CEO, replacing founder Marshall Cogan, 61, who remains a director.
Ironically, Penske's last New York City dealership venture ended badly. In 1987, Penske took over the New York City Cadillac franchise from megadealer Victor Potamkin and his sons. With encouragement - and financial support - from GM, Penske was supposed to raise customer satisfaction scores, compared with Potamkin's old-school, high-pressure sales tactics.
Potamkin got the last laugh. New York hazards, such as union troubles and building inspectors, held up the opening of Penske's expensively remodeled store for more than a year. After it finally opened, sales volume dropped. Penske pulled the plug on the dealership, and Potamkin took it back over in 1991 - vastly improved, partly at GM's expense.
In the UnitedAuto deal, an older and wiser Penske took pains to make sure the transaction is not an immediate windfall for the existing shareholders - except to the extent that share prices rise on the good news.
'An important component of the transaction is that we purchased newly issued stock from the company, where the proceeds should be used to pay down the company's debt and to give the company the flexibility to enhance its existing operations,' said Jim Hislop, CEO of Penske Capital Partners.
In fact, Penske Capital's 38 percent will dilute the shares of the three biggest shareholders: Cogan's Trace International Holdings Inc., which has about 21 percent, pre-Penske; and investors Charlesbank Capital Partners LLC, at 15 percent; and Apollo Advisors LP, at 9.4 percent. Those three shareholders have agreed to support the Penske deal, when it is put to a shareholder vote. A shareholder vote has not been set.
LOW STOCK PRICE
UnitedAuto had cut back on acquisitions because of a shortage of funds and a lack of borrowing power. A low stock price also made it impossible to pay for acquisitions with UnitedAuto stock, said Thomson, who is an analyst for Charlotte, N.C.-based First Union Capital Markets. He is based in Richmond, Va.
Like other consolidators, UnitedAuto used both cash and stock to buy dealerships, but UnitedAuto never used stock as much as AutoNation Inc. - formerly Republic Industries Inc. - did. In at least one instance - when UnitedAuto bought the Indianapolis-based Young Auto-motive Group in the fall of 1997, for $50 million cash and $25 million in stock - UnitedAuto agreed to pay the seller the difference, if the value of the stock portion of the deal fell below a certain level. That 'make-whole' provision today would cost UnitedAuto about $12 million, Thomson said.
'The Penske deal should help with all three things - liquidity, availability of capital, and the stock price. I think part of the problem was also that would-be sellers didn't want to join what they thought of as a sick ship,' the analyst said.
In terms of share price, UnitedAuto has declined almost steadily ever since it went public on the New York Stock Exchange on Oct. 23, 1996. Its initial offering price was $30 a share, but the shares never fell below $34 on that first day. The stock hit an all-time low of $5.75 in February, but it rallied on rumors of the Penske investment, starting a few weeks ago. On Friday, April 16, it closed at $9.50.
Said Thomson: The Penske deal was 'the worst-kept secret in auto retailing.'