'18 may bring dealership buy-sell bonanza

Early indicators signal a bustling buy-sell market this year as individual dealers and groups contemplate selling to exit an increasingly complex and uncertain retail world — or buying more stores to gain scale to better compete in that evolving retail landscape.

"Since the end of December, we have been getting nonstop calls — buyers and sellers, but mostly sellers," said buy-sell adviser Sheldon Sandler, partner in Bel Air Partners in Hopewell, N.J. "Private equity interest has died down, so they're not the buyers. It's the larger dealer groups, public and private."

Erin Kerrigan, managing director of buy-sell advisory Kerrigan Advisors in Irvine, Calif., predicts the public groups will be "much more active" in 2018. "Some of them will be making big bets on major groups and maybe even beyond our borders."

Asbury Automotive Group Inc., for example, is aggressively looking to buy in new markets. Meanwhile, Penske Automotive Group Inc. indicates it may unload some stores this year.

There is "an enormous amount of deliberation" by large, family-owned dealership groups over whether to sell, said Kerrigan. That's in part due to a generational shift. "The dealer is at an age where they have to make a decision to pass the business on or decide it's the responsible thing to sell it," she said.

Add to the mix the uncertain impact of self-driving cars, new ownership models such as subscription services and electrified vehicles. Some dealers are more seriously considering whether it's "fair to pass on an enormous business that may go through some pretty significant changes" to the next generation, said Kerrigan.

Said Sandler: "There are pressures on big groups to get bigger and have more scale, and the smaller dealers are collectively seeing the writing on the wall and heading for the exits in greater numbers."

Many of these pressures were true in 2017, when buy-sells slowed from 2016's torrid pace, but the new-vehicle sales slowdown is increasing the sense that now is the time to act. Moreover, public dealership groups are returning to buying dealerships rather than focusing on stock buybacks, advisers said.

Buy-sell adviser Alan Haig, president of Haig Partners in Fort Lauderdale, Fla., added that some dealers believe the market is at the top of its cycle, with limited upside, making it a good time to cash out. He is seeing sellers with anywhere from one to 15 stores.

"Manufacturer requirements for facility upgrades continue to drive buy-sells, too," said Haig. "The increasing complexity of the business is also driving some people to sell: all the OEM incentive programs, thinner margins, human resource laws and the ongoing shift to the digital world — for some dealers, it's proven challenging."

For many of the big private and public auto-retail groups, now is the time to grow or go as they prepare for the changing future. That may include expanding into new geographical markets.

Take Asbury, which was generally quiet in the buy-sell arena over the last few years. Last year, it snapped up Hare Chevrolet and its collision center, Isuzu dealership and truck center in Noblesville, Ind., near Indianapolis. Indianapolis is a new market for Asbury, and it is aggressively expanding there.

This month, Asbury acquired Terry Lee Honda in Avon, Ind., and rebranded it with the Hare name. Terry Lee said he sold the Honda dealership to make space for more stores in the dealership group's portfolio. There are 72 acres of land on the north side of Indianapolis where Lee hopes to add five or six dealerships.

Asbury, in Duluth, Ga., has 84 rooftops and is shopping in new markets, where it is close to making offers on more stores, CEO David Hult told Automotive News on the sidelines of the Detroit auto show this month.

"We're open to looking at any market," Hult said. "It's more the acquisition: How well would it align with how we operate? Then we look around the market itself. Is this a market we think we can expand in?"

In contrast, AutoNation Inc. CEO Mike Jackson said he plans to be an active buyer and seller this year but won't enter new markets. And Penske Automotive Chairman Roger Penske implied he could sell underperforming stores this year.

What does all of this portend for prices?

Haig said dealership profits largely have held steady over the last few years, supporting dealership valuations. Dealerships that sell German luxury brands have seen the most compression in prices, which spiked in 2015 and have returned to more reasonable levels.

Sandler said top-line brands in desirable markets still will command high values. Likewise, a profitable store that is exclusive to a market also will have leverage because large-group buyers will "want that niche deal," he said.

For example, Sandler advised in the sale of a group of stores in Albany, N.Y., a year ago. "You wouldn't think Albany would be a hot area, but it was highly contested," he said, noting that large dealership groups from Chicago to Florida bid for it because it was a profitable group with good store locations and the only Audi store in the market.

Hannah Lutz contributed to this report.