Buy-sells are unleashed after COVID slowdown

Texas dealers Rene Isip and John Eagle saw the way consumers wanted to buy vehicles increasingly shifting online — and that only intensified during the coronavirus pandemic. With it becoming tougher to compete with bigger public and private dealership groups, the partners crunched the numbers on what it would take for John Eagle Dealerships to build its own robust online sales technology systems and vehicle distribution network.

The verdict: It was simply too costly.

"You have to be either big or get bigger because they're the ones that have the technology," said Isip, former COO of the dealership group. "They have the distribution to be able to sell on the Internet."
So John Eagle Dealerships in August sold 10 import-brand dealerships in two transactions to public retailer Lithia Motors Inc. and another luxury store to Park Place Dealerships. Isip, 61, now has one Honda store left in San Antonio, and Eagle, 66, has retired.

The John Eagle group is among an increasing number of retailers putting their stores on the market, dealership buy-sell experts say, and its deals helped fuel an acceleration in dealership transactions since June after acquisition activity slowed to a crawl in mid-March as the coronavirus outbreak took hold in the U.S.

Thirty-three dealerships changed hands in June, according to the second-quarter Haig Report, published by Haig Partners, a buy-sell firm in Fort Lauderdale, Fla. That followed just three stores selling in April and six in May, Haig Partners said. The slowdown pushed the acquisition count for individual dealerships for the first half of 2020 down 16 percent from 2019.

Kerrigan Advisors, an Irvine, Calif., sell-side firm, however, said in its second-quarter Blue Sky Report that the number of dealership transactions — both single-store and multistore sales — rose by nine deals in the second quarter to 58. And first-half buy-sell transactions increased 9.7 percent to 113, Kerrigan Advisors said.

"We're as busy as a firm as we ever have been," said Erin Kerrigan, managing director. "The volume of transactions that are tracking to close in the second half is at a peak level for our firm."

Haig Partners and Kerrigan Advisors both use data from the Banks Report and their own industry analysis to compile the figures. Kerrigan Advisors also cites Automotive News.
Buy-sell activity came roaring back late in the second quarter, led by a flurry of transactions delayed to June, and that cascade has spilled into the third quarter, said Alan Haig, president of Haig Partners. His firm expects to close on transactions involving 20 dealerships in the third quarter.

Unlike the Great Recession, when buyers couldn't get loans to acquire dealerships, Haig said banks are ready to lend to dealership buyers looking to grow.

"In this pandemic, dealers are making a lot of money. There's plenty of capital. In fact, the cost of capital fell because of lower interest rates," Haig said. "It's just a remarkably better business environment for dealers in this recession than it was in the last recession."'

Kerrigan said buyer interest, including some from private investors seeking to enter auto retail, is growing as dealerships have recovered from the severe and sudden financial losses they faced early in the pandemic. Buy-sell experts said many dealerships posted record months for profits in the summer.

"I see buyers really looking at this period as a moment in time to truly transform their business and make significant acquisitions to capitalize on the benefits of economies of scale," Kerrigan said.

Pinnacle Mergers & Acquisitions in Frisco, Texas, saw closings held up because of COVID-19 and automaker approval delays until June 1, "when things broke loose" and pre-COVID deals began to close, CEO Bill Scrivner said.

Of Pinnacle's 25 deals under contract pre-COVID, three closed before March 15, Scrivner said, and 15 closed between June 1 and mid-September. He expects the rest to close in the next 60 days.

Scrivner said he has seen more sellers coming to market than in the past few years, convinced that now is the time to exit amid the pandemic and uncertainty about the future of auto retailing.

But there are buyers for the stores, and Scrivner said his 2020 deal count could be higher than last year.

"I've got 10 more offers on the table right now that would take it to 35," he said.

Sellers also are coming to market now because dealership values are so high.

Kerrigan estimated the average dealership blue-sky value was $6.6 million in the second quarter, up 3.3 percent from the end of 2019. Blue sky is the intangible value of a dealership, including goodwill. According to Kerrigan, the average dealership enterprise value, when including real estate, is at a record $17.7 million. Real estate value for the average dealership has jumped 15 percent since 2015 to $11.1 million, she said.

Haig said the average dealership blue-sky value rebounded in the second quarter to $6.4 million, up 5 percent compared with the end of the first quarter though down 5 percent from year-end 2019.

Deal pace should remain fairly strong for the rest of 2020, Haig said. He predicts 20 dealerships selling each month for the rest of the year — a bit below the second-half's typical pace because of coronavirus delays.

And the second half began with lots of activity. Public retailers Lithia and Asbury Automotive Group Inc. closed on large, multistore deals such as Asbury's $735 million purchase of eight stores, an auto auction and two collision shops around Dallas from Park Place.

Lithia, the lone public retailer to purchase dealerships in the second quarter, continues its buying spree. It has purchased 16 stores this year to reach 200 dealerships nationally.

Acquisitions are key to Lithia's goal to nearly quadruple annual revenue to $50 billion in five years. CEO Bryan DeBoer said in July that Lithia aims to buy dealerships generating $4 billion in annual revenue over each of the next five years.

"The opportunities for consolidation within our industry remain plentiful, and our pipeline for acquisitions remains full," DeBoer said.