Private buyers drive dealership buy-sell activities in first half of '22

Matt McGovern went on a dealership acquisition spree to start 2022.

With the exception of April, McGovern bought one franchised dealership each month from January through June, bolstering McGovern Automotive Group's presence in Massachusetts with five more stores.

McGovern's acquisition activity is a microcosm of the buy-sell market for the first half of the year: Private groups — not the publicly traded auto retailers — collectively were the most active buyers, often completing deals for just one or two dealerships at a time.

Automotive News, which last year for the first time rigorously documented dealership acquisitions, tracked 178 buy-sell transactions in the first half of 2022, involving 253 U.S. franchised dealerships trading hands. The transaction count rose 19 percent from 150 in the first half of 2021, while the number of acquired dealerships slipped slightly from 261 in the year-earlier period.

Lithia Motors Inc.'s supersized purchase of Michigan's Suburban Collection and its 34 franchised dealerships closed in April 2021, accounting for 13 percent of the dealerships sold in the first six months of 2021. There was no similar megadeal in the first half of this year.

"The activity was really driven by the private sector because the publics significantly reduced their acquisition spending in the first half" of 2022, Erin Kerrigan, managing director of Kerrigan Advisors, a sell-side firm in Incline Village, Nev., told Automotive News.

"What we're finding is it's a little bit of a tale of two worlds in that ... the private sector is making a tremendous amount of money and is redeploying that capital into dealerships to increase scale," Kerrigan said. "Because scale seems to be a top priority for most groups as they look to tackle the changes that are coming down the pike in our industry. And yet the publics have pulled back a bit on acquisitions."

Dealership acquisition spending by the public groups in the first six months of 2022 was down by nearly half, with fewer transactions and a 69 percent decline in the number of stores acquired.

One factor that made 2021 arguably the biggest year for dealership acquisitions was a surge of transactions in the fourth quarter. There were 153 deals in that quarter alone, or 40 percent of the year's tally.

The year-end concentration of deals likely would have been even higher had some transactions been completed faster. Instead, some were pushed into 2022, which aided this year's fast start.

"Some of the stores that we closed in '22 actually drifted from '21," said McGovern, CEO of his namesake group in Newton, Mass. "We closed two stores right quick in '22, which were really '21 acquisitions."

Many private dealers have continued buying into the second half of 2022.

McGovern, an auto retail veteran who co-founded New England's Prime Motor Group, bought two New York luxury stores in October and a Kia store in a Boston suburb in November. His group, which he founded in 2016, now has 23 franchised and used-only dealerships across Massachusetts, New Hampshire and New York.

And he's not done. McGovern said he has two domestic brand dealerships under contract and anticipates closing on them before year end.

"It's been a big year," McGovern said.

Ken Ganley, CEO of Ken Ganley Cos. of Broadview Heights, Ohio, bought a pair of dealerships in 2021. He continued buying in 2022 with the purchase a Kia dealership in suburban Cleveland in February.

The group, which ranks No. 15 on Automotive News' most recent list of the top 150 dealership groups based in the U.S., then bought another Kia outlet in West Virginia in September and purchased two more Kia stores in Ohio this month.

"We always look to add something from four to six dealerships a year, unless it's a larger group," Ganley said. "I guess we knew we were going to add, but we didn't exactly know that they would all be Kia stores."

Haig Partners, a Fort Lauderdale, Fla., buy-sell firm, estimated in its second-quarter Haig Report that 225 dealerships traded hands during the first half of 2022, up 2.7 percent from the first half of 2021. His firm last week also estimated 100 dealerships traded hands in the third quarter.

Kerrigan Advisors' Blue Sky Report for the second quarter counted 167 transactions in the first half of 2022, up 16 percent from 144 in the same period last year. Transactions, as counted by Kerrigan Advisors, can be single- or multiple-store deals.

The Haig and Kerrigan reports said the public groups' acquisition activity had dropped through the first half of this year, though their tracking differed slightly from the Automotive News data.

Alan Haig, president of Haig Partners, said while the publics' acquisition activity remains high compared with the period before the coronavirus pandemic, it is below last year's first-half pace.

Presidio Group, an investment banking and advisory firm based in Denver and Atlanta, said in its annual "Where the Rubber Meets the Road" report that there's a reason for less spending by the publics on acquisitions.

"With public company stock prices under pressure and interest rates on the rise, the investment hurdle rates for public companies have increased, putting them at a disadvantage to the private buyers, especially for more expensively priced transactions," Presidio President George Karolis wrote in the report.

Several of the publics such as giant AutoNation Inc. have increasingly bought back their own stock instead of buying dealerships.

Still, Haig expects the public groups such as Lithia, which has an aggressive target to reach $50 billion in annual revenue in 2025, will continue to buy dealerships. Asbury Automotive Group Inc., for example, indicated in August to Automotive News that it has trimmed enough debt to again be looking for acquisitions.

Asbury also has "a big revenue target that's out there that really can only be hit if they continue to acquire dealerships," Haig told Automotive News.

Asbury would need to acquire dealerships generating more than $6 billion in annual revenue to hit its 2025 annual revenue goal of $32 billion.

Buyers face record store values as dealership profitability has soared the last two years.

Haig Partners estimated that the blue sky value of a store owned by a public dealership group was $26.4 million in the first half, up 31 percent from the end of last year. However, that value dropped 9.8 percent to $23.8 million by the end of September, the firm estimated. Blue sky is the intangible value of a dealership, including goodwill.

Haig said dealership profits remain high, though they appear to have plateaued.

According to Kerrigan's report, average blue sky value reached a record $12.1 million in the second quarter, passing the previous record of $11.5 million set in the first quarter and up 33 percent from the second quarter of 2021, when it was $9.1 million.

Haig, whose firm has been involved in the sale of 40 dealerships this year, said he expects transactions to finish the year at a heightened pace.

"We're going to continue to see a lot of activity by private buyers," Haig said. "They have more cash flow than they've ever had in their careers."

Ganley is one of those private buyers who will remain active. He said his group has additional acquisitions in the works but is unsure whether they will close by year end.

"It's certainly been a very hot market," Ganley said. "We've been involved in a number of potential transactions that ultimately ended up selling to other buyers."

Looking ahead, Ganley projects that 2023's buy-sell market will be similar to 2022's.

"Prices are high. Profits are high," Ganley said. "Will it cool down a little? Maybe a little bit. But I don't necessarily see [dealership sales] going back to pre-COVID numbers."

Melissa Burden contributed to this report.