Analysts: Asbury deal curbs takeover threat

Asbury Automotive Group Inc.'s pending $3.2 billion purchase of Larry H. Miller Dealerships makes a possible takeover by fellow publicly traded, acquisition-focused rival Lithia Motors Inc. unlikely, analysts said last week.

In fact, University of Michigan Ross School of Business professor Erik Gordon said Asbury might have protected itself from takeover threats by any of the large public dealership groups.

"I won't say they are impregnable," he said of Asbury. "But I think they've cut the chances of being taken over by about 50 percent."

Automotive analyst Maryann Keller, owner of Maryann Keller & Associates, also called a Lithia takeover unlikely as a result of the cost of buying Asbury. "This is now a giant," she said.

Asbury generated $8 billion of revenue in 2020. The dealership group estimated last week that sales will total $15.5 billion when adding Larry H. Miller's $5.7 billion of annual revenue and $900 million worth of sales from undisclosed dealerships under contract.

Lithia declared an aggressive growth strategy last year, saying it planned to expand from $13 billion to $50 billion in revenue by 2025 and "profitably consolidate" the dealership industry.

Lithia of Medford, Ore., ranked No. 3 on Automotive News' list of the top 150 dealership groups based in the U.S., with retail sales of 171,168 new vehicles in 2020. It's now the country's second-largest group following its acquisition of Suburban Collection in April.

Asbury, of Duluth, Ga., ranked sixth on that list in new-car sales at 95,165 and was the smallest of the publics prior to buying several Park Place stores in 2020.

Larry H. Miller, of Sandy, Utah, was eighth with 61,097 new vehicles sold.

Asbury's heightened revenue means "it becomes increasingly difficult" for Lithia to buy the group, agreed Rajat Gupta, an analyst for J.P. Morgan Chase & Co.

Lithia declined to comment for this report.

Asbury would have represented a complementary geographic footprint to Lithia, Jeffries analyst Bret Jordan said. An Asbury with Miller's locations creates more overlap, he said, but Seaport Research Partners analyst Glenn Chin felt Asbury would still appeal to Lithia.

Chin said Lithia could "definitely" still attempt to buy Asbury, though he agreed that Asbury's new size would pose a challenge. Morningstar analyst David Whiston didn't rule out Lithia or another company trying to bid for the larger Asbury.

But Lithia could also just buy dealership groups that fall into the "big, but ... not megabig" category, said Whiston. Those groups would have a tougher time competing with larger brands and might be more amenable to a sale and less expensive for Lithia, according to Whiston.

Finally, there's the question of whether Lithia would "want to go hostile," which can be a distraction, according to Whiston.

Gordon said pairing Lithia with Asbury would create a "merger of equals" scenario.

"Those are really hard to do," he said, saying such mergers are "likely to fail." A successful merger needs a dominant party, Gordon said.

Asbury could merge with other large retailers, he said, such as AutoNation Inc., Penske Automotive Group Inc. or used-vehicle retailer CarMax. AutoNation, of Fort Lauderdale, Fla., and Penske, of Bloomfield Hills, Mich., ranked No. 1 and 2, respectively, on the Automotive News top 150 list. AutoNation sold 249,954 new vehicles in 2020, and Penske sold 178,437.

However, Asbury would represent a "big bite" for any of them and dilute the value of owners' shares if new stock were issued to fund the purchase, according to Gordon. "I don't think anybody's gonna come after them," he said of Asbury. "They've reached that critical mass."