A brighter business outlook in the States is one reason Canadian dealer groups are buying U.S. stores

Several Canadian dealership groups have recently reached across the border to expand or build U.S. footprints as part of what one industry buy/sell expert calls a trend driven by “sun-seeking” and better growth prospects.

Calgary-based Foundation Automotive has twice added to its U.S. network in 2022, firming up two deals for six rooftops in Texas. In February, the East Coast-based Steele Auto Group disclosed the purchase of a pair of dealerships, also in Texas.

And as 2021 drew to a close, western Canada’s Knight Automotive Group stepped into the United States with the purchase of two California dealerships.

Erin Kerrigan, managing director of Nevada-based Kerrigan Advisors, said the weather isn’t the only factor luring Canadian dealership groups south. Population growth, better acquisition prices and greater stability are also influencing the moves.

“As the industry prepares for a lot of change as related to electrification and digital retailing,” Kerrigan said, “there is more risk to the retail model in Canada than there is in the U.S., where we have more robust franchise protections embedded in our individual state franchise laws.”

‘PRETTY RICH’ PRICES

Along with concerns about the encroachment of the direct-to-consumer sales model, Kerrigan said, the “pretty rich” prices for dealerships in Canada are among the top reasons that Canadian groups are broadening their horizons. At the end of March, she said, she was working on three major deals involving Canadian dealership groups headed to the United States.

“With the understanding that there is more protection in the investment, it’s highly appealing in the U.S. because you have more opportunity to increase return on investment in the U.S. than you can in Canada,” Kerrigan said.

Following Steele Auto Group’s purchase of two Texas Hyundai stores this year, Steele President Kim Day said the Dartmouth, N.S.-based company is just getting started in the United States.

“Our highest growth opportunity is in the United States,” she told sibling publication Automotive News in February. “We’re very interested, of course, in growing our presence in that Texas market. We’re also really interested in opportunities in Florida [and] even closer to home ... in the New England states.”

Some movement is also occurring in the opposite direction. Last August, for instance, Lithia Motors Inc. acquired Pfaff Automotive Partners and its more than a dozen Ontario dealerships.

Lithia has added one rooftop to Pfaff’s portfolio this year, announcing the purchase of Sisley Honda just north Toronto on May 3. Yet Kerrigan expects this sort of cross-border activity to be the exception, not the rule.

“I do not expect to see as significant an increase in U.S. dealers going north as we are seeing Canadian dealers going south,” she said.

‘THIS IS HYPE’

Unlike Kerrigan, Samir Akhavan, managing partner at Toronto’s Templeton Marsh, is not convinced that the recent cross-border deals represent anything outside the status quo.

“Frankly,” he told Automotive News Canada, “I think this is hype.”

More often than not, Akhavan said, recent U.S. purchases by Canadian dealership groups have been a “continuation of old activity,” as opposed to new buyers pushing into the United States.

For the Foundation, Steele and Knight dealership groups, this is partially the case.

Despite being headquartered in Calgary, 21 of Foundation’s 23 locations are south of the border. Steele entered the U.S. in 2020 and backed up its initial three-dealership purchase with the recent Texas acquisition.

Knight’s December expansion into California, however, was the group’s first foray into the United States.

Outside of a handful of outliers, Akhavan does not see cross-border purchases as a “significant piece of the retail automotive puzzle.”

“If you want to do a deal, wouldn’t it be easier for you to do it with someone you know or know of than somebody you don’t know at all?” he said.

While Akhavan is skeptical about cross-border activity gaining traction, he expects further industry consolidation as dealers adapt — or head for the exit — due to challenges such as EVs and the agency model.   

“Things are changing,” he said. Dealers “don’t know how much, how quickly, but a lot of these guys are starting to look for dance partners and they’re saying, ‘I don’t want to be the last guy on the dance floor without a dance partner.’ ”

—With files from Melissa Burden and Jack Walsworth