Ken Garff's pioneering partnership breaks up

April 21, 2018 01:00 AM

On a fall day in 2005, dealer Robert Garff and his financier pal, Ian Cumming, took a bike ride around Salt Lake City that would lead to a historic marriage.

Cumming, co-founder of Leucadia National Corp., and Garff, chairman of Ken Garff Automotive, got the idea to join forces. Within a year, Garcadia was born.

Garcadia, a limited liability company created to buy dealerships, helped Garff snap up 28 dealerships over 12 years in Texas, Michigan, Iowa and California. Today, Ken Garff Automotive owns 54 dealerships.

Hopkins: Open to new partners

"We were one of the first to bring in a private equity group," Ken Garff CEO Brett Hopkins told Automotive News. "They were instrumental in our growth."

Now, the two will divorce. Ken Garff will buy out Leucadia's stake in Garcadia.

"It's the largest acquisition we've made. It's kind of like we're acquiring ourselves," said Hopkins. "We are acquiring what we know pretty well, so we consider it a low-risk acquisition."

Ken Garff, of Salt Lake City, ranks No. 8 on Automotive News' list of the largest dealership groups based in the U.S., with 69,888 new-vehicle retail sales last year. Its 2017 revenue was $4.59 billion.

Its deal to buy out Leucadia's equity interest in Garcadia and associated real estate was years in the making as Leucadia started restructuring to focus more resources on its investment bank. To that end, Leucadia is divesting many interests, including its share of Garcadia and a 48 percent stake in National Beef Packing Co., of Kansas City, Mo. It will rename itself Jefferies Financial Group Inc., according to a statement Leucadia released April 9.

The deal

Then: In 2006, Ken Garff Automotive and Leucadia formed a limited liability company, Garcadia. It acquired 28 dealerships.

Now: Ken Garff will buy out Leucadia's equity interest and the real estate.

How much: $425 million, payable $375 million in cash and $50 million in redeemable preferred equity

Why: Leucadia is selling several investments to restructure and rename itself Jefferies Financial Group.

When: The deal is expected to close in the 3rd quarter.

Hopkins said it took about 90 days for the two sides to finalize and agree to terms. The sale price, based on a $675 million enterprise valuation, is a net $425 million, payable $375 million in cash and $50 million in redeemable preferred equity. Since 2006, Leucadia has cumulatively invested $321 million in Garcadia and received cash distributions of $394 million. Hopkins expects to close on the deal in the third quarter.

The deal will not impact Ken Garff's dealership operations, but it "definitely depletes our war chest," said Hopkins. Nonetheless, he said, the group will be able to acquire more stores this year and next "as those opportunities present themselves."

Ken Garff wants to buy more dealerships in the Sunbelt states, Utah, Colorado and Texas, he said. And it's open to a new partnership, he said.

"We're not afraid to have a new partner. We have had a good experience in the past, and they added value," said Hopkins. "But we will be without a partner for the near future."

Ken Garff's partnership with Leucadia was groundbreaking in 2006. At that time, Robert Garff predicted outside investors would become increasingly common in automotive retail as dealership groups sought growth.

"It's a trend that's coming as you get bigger and bigger dealerships," Garff said in a 2007 interview with Automotive News. "How many people can buy an operation in a big city that sells 3,000 to 4,000 cars a year and has plant, equipment and real estate worth $70 million? Private parties don't have that kind of cash."

Outside investors

Since then, the industry has seen several examples of such partnerships. In 2014, for example, Warren Buffett's Berkshire Hathaway bought dealership giant Van Tuyl Group. A year later, the family office for billionaire financier George Soros, along with investment arms for the families of drugstore enterprise founder Stephen LaFrance Sr. and transportation mogul J.B. Hunt, provided financing for McLarty Automotive Group.

"We received a comment from a manufacturer that they consider Ken Garff to be one of the first to bring in a nontraditional partner in the form of private equity," Hopkins said, "and they see us as the first to complete the cycle, buy them out and continue on our own.

"Time will tell if that was the right approach or not."