When Steve Kalafer revealed last month that he was buying back 10 New Jersey dealerships that he had sold to AutoNation Inc. just three years ago, insiders figured somebody lost a lot of money.
Dealers assumed that AutoNation, the nation's largest dealership group, paid too much for the stores during its acquisition binge in 1997. They guessed that AutoNation, now less aggressive and suffering from a low share price, had been forced to sell them back at a bargain price.
The alternative theory was that Kalafer got hurt when the roughly $55 million in AutoNation stock that he got for the stores collapsed. The shares were worth about $24 when he sold the stores in 1997, and are now at around $6.75.
It's more complicated. And each side did all right.
Neither Kalafer nor AutoNation will disclose the buyback price. But a chain such as Kalafer's could be worth $5 million more than what Kalafer sold it for, said Sheldon Sandler, founder of Bel Air Partners, an automotive investment firm in Princeton, N.J.
The dealerships, which represent 22 franchises, have combined annual sales of about $400 million. If the chain makes 3 percent net profit on that - AutoNation stores have been averaging more than 3 percent on sales - it would net $12 million annually.
Sandler said good dealerships today sell for 4.5 to 5 times earnings, meaning the Kalafer chain would fetch around $60 million.
Three years ago, AutoNation appears to have paid almost six times the chain's earnings. Securities and Exchange Commission documents show that the stores had net profits of about $2.4 million for the first quarter of 1997. That was the going rate at the time for high-volume dealerships in desirable markets, brokers say.
Kalafer said the Flemington, N.J., chain was worth every bit of what Fort Lauderdale, Fla.-based AutoNation paid when he sold it in 1997 and that he believes the chain is worth more than it was three years ago. AutoNation has been a good operator.
'There's no question the profitability improved' Kalafer said, because of better central accounting methods and technology.
CONTROL OF DESTINY
Kalafer stayed on at the store as an AutoNation employee after the sale. He said he bought back the stores to 'be in control of my own destiny.' For AutoNation, the New Jersey locations were outside of its Sun Belt strategy.
As for Kalafer, he didn't sink with AutoNation stock. He quickly sold all his shares before the end of 1997. The price ranged from $23 to $34 a share from the time the acquisition was announced in March until the end of that year. SEC documents show Kalafer received 2.3 million shares of AutoNation stock at just under $24 per share from the acquisition - roughly four times today's price per share.
The dealerships include Flemington Car and Truck Country in Flemington, N.J., and Princeton Nassau Conover Family of Dealerships in Princeton, N.J. Kalafer's buyback, announced in October, is expected to close by Dec. 31.