Well-capitalized private dealership groups and outside buyers, such as family offices and private equity firms, will dominate buy-sell transactions this year -- as publicly traded retailers dial back, buy-sell advisers predict.
"The public companies, largely because their stock prices have fallen significantly over recent months, are saying their cash is better used buying back stock or buying dealerships other than U.S. auto retail -- England, Brazil and, in Penske's case, commercial-truck operations," said Alan Haig, president of Haig Partners in Fort Lauderdale, Fla.
Stock prices of the six publicly traded new-vehicle dealership groups took a severe hit in recent months, implying that Wall Street expects lower profits from them. Some of the industry's most prominent dealership buyers have said they expect to do fewer deals this year because they are unwilling, in the face of slipping profits, to pay prices that would presume a continuation of 2015's robust profit margins. And sellers aren't ready to lower their asking prices, advisers said.
"The publics evaluate every transaction against their own stock price, and if it economically makes more sense to buy back their own stock, they will do so," said Erin Kerrigan, managing director of Kerrigan Advisors in Irvine, Calif. "That creates more opportunity for new entrants to make some big transactions."
Last year, new entrants represented nearly a third of the buy-sells done. Their tally was four times the number bought by the six public dealership groups, Kerrigan said.
In Kerrigan's Blue Sky Report for 2015, she said 558 franchises were sold last year. Outside buyers bought 165, private dealership groups 355 and the publics 38, or 6.8 percent.
The Haig Report said the public companies spent $773 million last year buying U.S. dealerships, down from $1.5 billion in 2014. The 2014 figure was inflated by Lithia Motors Inc.'s purchase of DCH Auto Group.
Kerrigan said another deal that size, while not out of the question this year, is unlikely. "Publics will be in the $500 [million] to $800 million acquisition spending range this year. I don't think they'll go over that," Kerrigan predicted. "It just depends where their stock price will be."
Most medium-size private dealership groups have a war chest of cash from years of vibrant car sales to do deals, and they can borrow money at cheap interest rates. Haig noted that the average dealership acquisition, if no debt is involved, delivers a 17 percent return on investment. "That's a better return than keeping money in the bank, so we think these private dealership groups will want to grow," Haig said.
If new-car sales plateau or decline, prices will go down, so dealerships will remain attractive to private equity and family-office buyers.
"A year to a year and a half ago, they were just coming onto the stage," Haig said. "These groups want to continue to grow, and they are smart investors who will be disciplined with their offers."