Dealership buy-sell deals gain momentum

Dealership buy-sell deals surged in the second quarter after starting slowly this year, and some buy-sell advisers now predict 2018's pace will keep up with last year's.

U.S. dealership transactions totaled 75 in the second quarter, according to the Blue Sky Report by Kerrigan Advisors in Irvine, Calif. Through June, there have been 114 deals, up from 101 at the same time a year ago. Multistore deals also are up with more sellers coming to market.

"We think there will be over 200 transactions this year, which would mean that would be the fifth consecutive year of over 200 transactions," Erin Kerrigan, managing director of Kerrigan Advisors, told Automotive News.

The Haig Report, another industry report that tracks dealership acquisition activity, estimated that 86 stores traded hands in the second quarter, up 87 percent from the same period a year ago.

"The market is very active," Alan Haig, president of Haig Partners in Fort Lauderdale, Fla., told Automotive News. "We're working on more transactions than we ever have been."

Haig, who said his firm is expanding to handle volume from clients, attributed the rebound to tax code changes that cut taxes for dealerships and to more sellers entering the market. For the first half of 2018, Haig's firm estimates 179 deals were completed, up 23 percent from the same six months of 2017.

Public retailers spent $481 million in the first half of 2018 — up 9 percent from the same six months of 2017 — acquiring 21 dealerships, according to the Blue Sky Report. Haig's report said spending by the publics on 21 dealerships totaled about $500 million.

Group 1 Automotive Inc., Asbury Automotive Group Inc. and Lithia Motors Inc. completed deals during the first six months.

Lithia, for example, bought Honda and Acura stores in Buffalo, N.Y.; Day Auto Group in Pittsburgh; six locations from the Prestige Family of Fine Cars in Bergen County, N.J.; and two Ford stores in Idaho Falls, Idaho, and Eatontown, N.J.

Still, the public companies sold more stores than they acquired during the first half of the year, shedding 32 dealerships, according to the Blue Sky Report. Penske Automotive Group Inc. sold some stores it described as noncore, while Sonic Automotive Inc. sold three dealerships: Honda of Fort Myers in Florida, Toyota of Fort Worth in Texas and Massey Cadillac Dallas in Garland, Texas, to avoid making dealership improvements required by automakers. Lithia also has said it plans to sell about a dozen stores this year.

Haig expects the strong buy-sell pace to continue, as some older dealers look to sell while values remain strong and others because of concerns about the future of auto retail such as high capital requirements and changing technology.

"The market has evolved in 2018 to become more of a buyer's market than in previous years since there are more stores available for sale and pricing per dealership has fallen about 9 percent since the peak in 2015," according to the Haig Report.

Haig said more midsize dealership groups are pursuing what he calls a "Get Big or Get Out strategy," driven by the thinking that bigger dealers will thrive in the years ahead. In some cases, those dealers are exploring mergers — transactions in which the selling dealers keep some ownership of the stores and may continue to run the dealerships— as possible ways to finance growth and reduce risk.

Looking to 2019, Kerrigan expects the pace of buy-sell deals to stay strong despite talk of disruption in auto retail, rising interest rates and slight dips in dealership profits.

Values for stores have remained strong, though Kerrigan noted those could drop in 2019 if interest rates continue to creep up.

Haig and Kerrigan continue to see private dealership groups looking to partner with capital sources from outside the industry to help finance expansions.

The Blue Sky Report estimated that dealerships representing 192 franchises were sold during the first half of the year, with 170 going to existing non-public dealers or family offices (corporations for high-net-worth families), other investors and private equity-backed firms.

Kerrigan said some buyers also have been attracted to dealerships that have no-haggle pricing. She was involved in the sale of two such dealerships during the second quarter: Wilsonville Toyota and Wilsonville Subaru in Wilsonville, Ore. Kerrigan declined to name the buyer.

The no-negotiation sales model in some cases eliminates the F&I department and a layer of managers, cutting personnel costs, according to the Blue Sky Report.

Kerrigan said, "These successful no-haggle pricing stores have successfully reduced the expense structure associated with selling cars to the point where their profitability levels are three to four times the average in the industry."