Dealership M&A market cools following Soros buzz

When representatives of Wall Street financier George Soros told dealers in January at the National Automobile Dealers Association convention that the billionaire's family fund wanted to buy dealerships, it prompted a flurry of speculation that private-equity money and wealthy families' funds would open their fat wallets and inflate buy-sell prices.

But so far, deals aren't getting done.

"What we're seeing is a cooling off of the M&A market in terms of private equity and family funds," says Mark Johnson, president of buy-sell advisory firm MD Johnson Inc. in Seattle.

Outside money buying all or part of dealerships is nothing new. For example, Microsoft Corp. founder Bill Gates, through his Cascade family office, owns 14 percent of AutoNation Inc.

But in the last 12 months, Sheldon Sandler, managing partner of buy-sell advisory firm Bel Air Partners in Hopewell, N.J., has noticed a growing resistance from dealers to such buyers. Since August, he has had meetings with 29 "substantial and potential sellers," he says. Five said "maybe"; the other 24 were not interested in selling or taking a partner. 

Sandler had conversations with an additional 24 potential sellers who did not want to even meet with him once he told them the buyer's Wall Street affiliation. 

"I was stiffed. These are people I personally know; I wasn't a guy calling out of a clear-blue sky," Sandler says. "I was surprised, but they are just flat not interested."

Some of the hurdles to completing these buy-sells are long-standing: 

• Factories are wary of unproven private-equity investors, and sellers are reluctant to invest time in a potential deal that could be nixed by the factory. 
• Dealers who once might have considered taking on an investment partner to expand don't need outside capital now. They're flush from several years of robust car sales and can get low-interest loans from banks. 
• And deals simply take a long time to come together. Larry Van Tuyl first approached Warren Buffett about selling his dealership group to the Omaha, Neb., investor about five or six years before the deal came together last year. 

But in an otherwise active buy-sell market, Soros and other wealthy outside investors face a number of special challenges. Soros, for example, has been shopping for a year but still hasn't found a suitable deal, buy-sell experts say. 

A phone call to a Soros representative for comment was not returned.

The hype didn't help.

News that Soros and other investors had hundreds of millions of dollars to invest in dealerships stoked sellers' expectations of higher prices. Buy-sell advisers fed those expectations with comments that encouraged potential sellers to come to market.

Buy-sell adviser Alan Haig now says there was "maybe too much excitement" about private-equity and family fund firms' interest earlier this year. He says a few deals will get done this year but "not dozens."

Sellers who hike their asking prices are misreading buyers, he adds. "People involved in private equity and family offices are some of the smartest people on the planet," says Haig, president of Haig Partners, a dealership buy-sell advisory firm in Fort Lauderdale, Fla. "They're not going to overpay constantly."

On the other hand, Haig said he might advise them to "overpay for their first deal just to get started."

Bel Air Partners' Sandler agreed. His advice to potential buyers: "If you really want to get in, don't do the big deal; do the small deal and overpay, but get in the club. Once you're in the club, the reactions will be different." Having a track record as a dealership investor could make it easier to get factory approval for the next acquisition.

Another problem has been finding and structuring a deal that meets these buyers' criteria as well as sellers' desires.

The vast majority of buy-sell deals involve single-point stores. Blockbuster deals such as Buffett's purchase of Van Tuyl are rare because there are few dealership groups the size of Van Tuyl Group, and fewer still on the block. But big-money investors aren't looking to do 20 deals, each for two stores.

In addition, outside investors typically want to keep most of the target dealership's management. But a deal like that may not appeal to sellers.

Outside investors "cash out a dealer, but they still need the dealer to stay on and run the dealership and report to them. It's just not a very attractive exit for most dealers," says Erin Kerrigan, managing director for buy-sell advisory firm Kerrigan Advisors in Irvine, Calif. "Dealers haven't worked for someone in many years, and they certainly don't want to work for a private-equity firm."