Asbury-Miller tie-up raises stakes in retail consolidation

If there was any doubt a new era of dealership consolidation has arrived, Asbury Automotive Group Inc.'s announcement last week that it would buy Larry H. Miller Dealerships erased it.

The supersized deal — one of the largest ever in auto retail — follows two other megadeals disclosed last month: Group 1 Automotive Inc.'s pending acquisition of Prime Automotive Group and Sonic Automotive Inc.'s agreement to buy RFJ Auto Partners Holdings Inc. In April, Lithia Motors Inc. acquired Suburban Collection's 34 stores.

Those transactions, alongside a spate of smaller acquisitions this year, make 2021 the biggest year for dealership mergers and acquisitions in decades. But with the surge in activity by publicly traded groups and economic conditions ripe to support more sales, the big-deal era is just getting rolling, some market watchers say.

"I do expect that this is just the beginning of mega-transactions being announced over the next 12 months, assuming the financial markets continue to support the financing of these kinds of acquisitions," said Erin Kerrigan, managing director at Kerrigan Advisors, a sell-side firm in Irvine, Calif.

Kerrigan called the $3.2 billion Asbury-Larry H. Miller deal "a harbinger for the future" and predicted that big family-owned groups will increasingly opt to sell to or merge with larger companies. Larry H. Miller ranked No. 8 on Automotive News' most recent list of the top 150 dealership groups based in the U.S.

To be sure, publicly traded retailers are not the only buyers. But the publics' consolidation efforts combined with rising dealership profitability and improved access to capital have ramped up dealership buy-sell activity since late 2020.

George Karolis, president of Presidio Group, a Denver- and Atlanta-based investment banking and advisory firm, said today's market is strong for sellers, who are basing their decisions around portfolio management, return on investment and diversification.

"Capital markets are wide open," Karolis said. "Both debt and equity capital are at the lowest levels in terms of costs that they've ever been. The M&A environment is very active and wide open."

Kerrigan Advisors estimates that dealership transactions, both single- and multiple-store deals, rose 27 percent to 144 in the first half of 2021.

Haig Partners, a buy-sell firm in Fort Lauderdale, Fla., estimates 219 dealerships sold during the first half of 2021, nearly double the 110 sold in the first half of 2020.

Through the first nine months of 2021, Automotive News in initial counts has tracked 202 transactions and 347 dealerships trading hands.

One catalyst for the increased deal-making is the activity of Lithia Motors Inc., which has been on a long-standing acquisition tear. CEO Bryan DeBoer in July 2020 announced ambitions to grow Lithia to $50 billion in annual revenue in five years, largely through acquisitions.

"I think the CEOs of other public retailers said, 'Whoa, that strategy makes a lot of sense,' " said Alan Haig, president of Haig Partners.

High dealership valuations also are driving decisions to sell.

"I think that the Larry H. Miller folks realized that if they are going to exit, today was the day," Kerrigan said. "And the valuation that they're receiving is reflective of the strength of the auto retail market."

September's deal announcements by Asbury, Sonic and Group 1 further the case for the power of scale in the industry.

"Even the largest private groups see changes afoot in auto retail and realize that this is an industry where size is really going to dictate success," Kerrigan said. "Even a company as large as Larry Miller decided that they are better positioned to succeed as part of a larger organization than on their own."

Though the industry is still highly fragmented, data from the National Automobile Dealers Association shows that dealers increasingly own more stores.

In 2020, the industry's share of owners with one to five dealerships was 93.5 percent, down from 96.2 in 2011, according to NADA. The share of owners with six to 10 dealerships was 4.3 percent in 2020, up from 2.7 percent in 2011. But just 0.1 percent of owners operated more than 50 dealerships, the same percentage that group had in 2011.

Also, the share of U.S. dealerships owned by the top 150 groups as tracked by Automotive News is on the rise, from 13 percent in 2010 to 21.1 percent in 2020, according to the Automotive News Research & Data Center. The 10 largest groups made 8.4 percent of U.S. new-vehicle sales in 2020, while the top 150 delivered 23.1 percent.

Given this year's acquisition pace, those shares are positioned to rise higher for 2021 and beyond.

Larry H. Miller, at No. 8, is the highest-ranked group on the Automotive News list being absorbed. Prime is No. 18; RFJ, No. 42; and Suburban was No. 21.

The Asbury-Larry H. Miller deal, with its 54 new-vehicle dealerships and $5.7 billion in annual revenue, is expected to close by year end. Asbury said it will become the fourth-largest U.S. new-vehicle retailer as measured by annual revenue, with that figure reaching $13.7 billion. Asbury currently is No. 6 on the Automotive News list, which is ranked by new-vehicle retail sales.

Asbury CEO David Hult told analysts last week to expect more industry consolidation and indicated that Asbury would participate as it finds other groups that align with it. "We'll continue to do that and build it out," Hult said.

More deals are expected broadly across the industry.

Kerrigan and Haig both anticipate a second-half surge. Kerrigan predicted 100 transactions for each of the year's final two quarters and a 2021 total of about 350 transactions. That would compare with a record 289 in 2020.

Sonic CEO David Smith also expects more consolidation.

"We went through sort of the initial wave of it over the last 20 years, and I think that there's going to be another wave of it that's going to continue," Smith told Automotive News last month.

Brady Schmidt, CEO of National Business Brokers Inc. in Irvine, Calif., said the ongoing surge is even bigger than that first wave of the 1990s and early 2000s, when the public retailers were forming.

Back then, it felt like the Wild West, Schmidt said, with the publics paying high prices as they tried to establish credibility in the marketplace and with automakers. Now, the process is much more mature, he said.

Schmidt called the current wave "a lot more significant" than earlier consolidation.

"Vertical alignment, the buying power, the sway that these groups are going to have with manufacturers is going to change factory relations with these large companies," he said. "They're going to wield more power, more influence, in negotiating with the factories. They're becoming much more of a larger force in the industry."