Cultural fit crucial in Asbury acquisitions

For much of the past seven years Asbury Automotive Group Inc. was largely absent from the dealership acquisition market until the retailer made two major splashes: the August 2020 purchase of eight Park Place Dealerships stores for $735 million and the pending $3.2 billion purchase of Larry H. Miller Dealerships, the country's eighth-largest new-vehicle retailer.

Asbury during those years mostly devoted its cash to buying back shares, paying down debt and investing in its digital retailing tool Clicklane, said Asbury CEO David Hult, who joined the auto retailer as COO in November 2014 and became chief executive in January 2018.

"We're not looking to buy revenue to grow. We're looking to find organizations that culturally align with us and philosophically as far as operations go," Hult told Automotive News this month. "We figure those garner the best results. They have the lowest turnover and best appreciation of the asset and relationship. Behind those transactions are a lot of people, [and] not culturally aligned from a business perspective, it's usually not a good outcome. So we try and be very disciplined."

Hult pointed to the Park Place deal, in which it acquired luxury dealerships in Texas, as an example of finding that cultural alignment.

"It's a year later — all the leadership team is still in place, [and it's] going well," Hult said.

He noted that for every Asbury acquisition of the past three years, each store general manager remains with the company.

Asbury is stepping up its deal-making as buy-sell activity surges across the industry. Many of the public dealership groups are in accelerated acquisition mode, with several announcing megadeals this year as the industry consolidates.

Asbury, ranked by Automotive News as the nation's sixth-largest new-vehicle retailer, announced a five-year growth plan last year that calls for the retailer to grow from about $8 billion in annual revenue in 2020 to $20 billion in 2025. The aim then was for $5 billion of that incremental revenue to come through dealership acquisitions.

With the Larry H. Miller deal, slated to close by the end of the year, Asbury will have exceeded that revenue target within a year. The Larry H. Miller Dealerships purchase, including the Total Care Auto finance-and-insurance provider, is expected to add $5.7 billion in annual revenue.

And more is on the way. Asbury is under contract to buy dealerships that represent another $900 million in annual revenue. The majority of those pending acquisitions are stores located in the same states in which Larry H. Miller operates, Hult said, adding that he expects those deals to close by mid-November.

Now is an "opportune time to grow," Hult said, though he noted that expansion would be done "thoughtfully."

"There's a lot of big deals that have transpired over the last couple of years that we weren't a part of it," he said. "It didn't make them bad groups. We just didn't align with them. And we were slow this year. And you listen to the last couple of earnings calls — people were frustrated we weren't out buying stuff."

But Asbury is going to be "very disciplined with our plan," Hult said. "We're not just looking to buy revenue. If we were, we could have bought a lot more."

Morningstar analyst David Whiston, in a note to investors last month, said Asbury management "will buy back shares when it sees no desirable acquisition opportunities."

Whiston said the Larry H. Miller transaction will in part be paid for by issuing about $600 million in stock, diluting shares by about 15 percent.

From 2015 through 2019, Asbury repurchased about 10 million shares of its stock — or just more than a third of its shares outstanding at the end of 2014.

Asbury had 83 dealerships in 10 states at the end of 2014. By the end of 2020, those figures were 91 in nine states. In August, Asbury bought its second Subaru dealership and third Colorado store when it purchased Greeley Subaru in Colorado from Warren Yoder. In September, Asbury sold BMW of Charlottesville in Virginia to Flow Automotive Cos., exiting that market.

With Larry H. Miller's footprint in seven Western states, Asbury will reenter California, a state it had exited around the Great Recession, with its last store there being sold in May 2011, Asbury said. Asbury has been growing a presence in Colorado since 2019. The other states — Utah, Arizona, Idaho, New Mexico and Washington — are new for the group.

Asbury learned about the Larry H. Miller opportunity after J.P. Morgan, which was working with Larry H. Miller, reached out in June or July, Hult said.

The Miller executive team, led by President Dean Fitzpatrick, will stay in place, and Asbury will keep the Larry H. Miller name on the dealerships.

"Larry H. Miller is a name that's nationally known and well respected for all that that group has accomplished," Hult said. "We certainly see the value in the name and certainly want to respect the heritage."

Following the Sept. 29 deal announcement, Hult; Asbury CFO Michael Welch; Larry H. Miller Group of Cos. owner Gail Miller; her son, Steve Miller, chair of the Larry H. Miller group board of directors; and the Miller executive team traveled to meet store management teams. Hult said he told them Asbury would initially focus on "the relationship and the people first and get everyone integrated" before adding the Larry H. Miller dealerships to the Clicklane digital tool.

Hult declined to address the specifics of any potential framework agreement challenges or whether Asbury may have to sell any stores. He told analysts on a call last month that one brand may pose a problem. Framework agreements govern relationships between automakers and their largest franchised dealers and can limit the number of stores an owner can have of a certain brand overall or in a certain region.

With the Park Place deal, Asbury ran into framework issues with Lexus. It acquired two Lexus stores from Park Place and subsequently had to sell one Lexus outlet in South Carolina. Larry H. Miller has three Lexus stores — two in Utah and one in Washington.

Doing another huge deal for a while may be tough for Asbury. J.P. Morgan analyst Rajat Gupta, in a note to investors last month, said the Larry H. Miller deal "maxes out Asbury's balance sheet capacity for the next 18-24 months."

Hult said he expects Asbury's focus for the next six months to a year will be integrating Larry H. Miller into Asbury. But Hult acknowledges that he didn't see Park Place or Larry H. Miller coming its way and so would still look at any opportunistic acquisitions.

"If we found some stores that came up along the way that were a good cultural fit for us, we would find a way to make it work," he said. "But we're not obsessed with growing the company to hit a certain revenue target. It's really about creating a collection of good assets."

Asbury, of Duluth, Ga., ranks No. 6 on Automotive News' list of the top 150 dealership groups based in the U.S., with retail sales of 95,165 new vehicles in 2020.