Group 1's reach grows in deal for Prime stores

Group 1 Automotive Inc., in what would be one of largest dealership transactions in history and the second megadeal of the year, will expand its U.S. store count by a quarter and significantly increase its presence in the Northeast upon acquiring Prime Automotive Group, planned by late November.

The deal to buy the troubled Prime is Group 1's largest transaction to date, and it would accelerate the consolidation among dealership owners that's been a hallmark of the buy-sell market in 2021.

Publicly held Group 1 of Houston, the nation's fourth-largest dealership group, said last week that it had signed an agreement to buy 30 dealerships, three collision centers and real estate for $880 million from Prime, one of the largest privately owned groups in the country. The deal gives Group 1, which has a heavy concentration in Texas, increased geographic diversification and an additional base to build out AcceleRide, its digital retailing tool.

An announcement revealing Prime's destiny has been long anticipated. Prime's majority owner, GPB Capital Holdings, an alternative-asset management firm, has been marred by scandal and numerous lawsuits and faces allegations of conducting a Ponzi-like scheme by the U.S. Securities and Exchange Commission. The SEC in February filed a lawsuit against the firm, former CEO David Gentile and two related companies and associates alleging securities fraud. Gentile and two others were also indicted on criminal charges including securities fraud.

Despite GPB's woes, Group 1 said it sees success in Prime. In March, it bought two Toyota stores in Massachusetts from Prime, which has domestic, luxury and import dealerships.

"The opportunity to acquire well run dealerships in a market we are familiar [with], coupled with great brands and our ability to further leverage our industry-leading AcceleRide digital platform made this a natural fit for our company," Pete DeLongchamps, Group 1's senior vice president of manufacturer relations, financial services and public affairs, told Automotive News in an email.

The sizable transaction requires the approval of a court-appointed monitor, who as part of the SEC's case is overseeing dealership operations and safeguarding GPB-owned assets for thousands of investors who provided hundreds of millions of dollars that GPB used to buy dealerships.

DeLongchamps said last week that Group 1 executives had not talked with the monitor, Joseph Gardemal of consulting firm Alvarez & Marshal Holdings in Washington, D.C., but didn't foresee concerns with obtaining his approval.

"We expect no issues," DeLongchamps wrote in an email.

Gardemal, through a spokeswoman, declined to comment.

Group 1 also said it is not concerned about getting acquisition approvals from Volkswagen Group of America and Audi of America Inc. — two brands that GPB and Prime are tangled in litigation with. Prime has received termination notices for two Volkswagen dealerships and one Audi dealership.

Prime currently has 31 dealerships, but only 30 are part of this transaction. It's unclear which store isn't part of the deal, nor why. A Prime spokesman referred questions to Group 1.

A summary of the agreement, signed Sept. 12, says the deal will close within 75 days, "provided that the closing conditions are satisfied or waived," according to a Group 1 regulatory filing last week. That would mean a closing by Nov. 26 or Nov. 27.

It's unclear what would happen if that target were not reached.

It's an aggressive timeline to close such a large deal, and delays could happen, said Mark Johnson, president of buy-sell firm MD Johnson Inc. in Enumclaw, Wash., who is not involved in the transaction.

Johnson speculated that someone representing investors could file a lawsuit "if they don't think they're getting a fair shake, and that could slow [the closing] down."

Group 1 may not even end up with all 30 Prime stores should it run into limitations under framework agreements or face an automaker exercising its right of first refusal, Johnson said.

Framework agreements govern the relationships between automakers and their largest franchised dealers and may limit the number of stores one owner can have of the same brand or in a certain region.

The right of first refusal clause typical in franchise agreements gives an automaker the right to reject the original buyer on a dealership transaction and assign the sale, with no changes to the terms, to a dealer of its choosing.

Group 1, in its regulatory filing, did note that the purchase price could be adjusted for "any exercise of customary manufacturer rights of first refusal."

The purchase agreement also calls for putting aside $45 million of the purchase price that Group 1 could use if necessary to pay for any "post-closing indemnifiable losses," according to a regulatory filing made last week by GPB Automotive Portfolio, a holding company that owns 30 of Prime's 31 dealerships. That money would be released over two years back to Prime, pending claims.

Group 1 said it would pay for the deal using cash, lines of credit and financing and has already made an agreement with Wells Fargo for a $250 million bridge loan to help fund the transaction.

Buy-sell experts say that Group 1 likely has done a significant amount of due diligence on the deal and that the SEC monitor also likely has been involved in the marketing of the platform.

Automotive News reported last month that Prime was up for sale and that a sale was likely to happen by the end of the year. Public dealership groups, family offices and some large private dealers were thought to be interested in buying Prime.

The Group 1-Prime transaction would be the second supersized deal of 2021. In April, Lithia Motors Inc. bought Michigan's Suburban Collection with 34 stores.

Group 1 said the 30 Prime stores included in the deal sold more than 52,000 new and used vehicles last year and generated $1.8 billion in annual revenue.

Prime ranked No. 18 on Automotive News' most recent list of the top 150 dealership groups based in the U.S., with retail sales of 31,529 new vehicles in 2020. It generated more than $2.6 billion in revenue last year.

Group 1 was No. 4 on that list, with retail sales of 140,221 new vehicles in 2020 and revenue of more than $10 billion.

In the past few years, Prime has sold more than a dozen stores not in its core Northeast market. Prime already had sold five dealerships in 2021.

Group 1 has 188 dealerships in the U.S., U.K. and Brazil, plus 48 collision centers. It has eight stores in Massachusetts, four in New Hampshire and four, plus a collision center, in New Jersey, according to its website. Maine and New York would be new states for the group.

Once the Prime stores are acquired, Group 1 said it will have 147 U.S. dealerships, including 46 in the Northeast.

Group 1 said it is reviewing whether to keep the Prime name or change to the Ira branding it uses in parts of the Northeast.

That Ira brand has its own Prime connection, as it stems from Ira Rosenberg, who with son David Rosenberg in 2000 sold five Massachusetts stores to Group 1. Ira Rosenberg later became co-founder of Prime Motor Group, which was combined with GPB's Capstone Automotive Group in 2017 to form Prime Automotive Group.

Group 1's Toyota stores acquired from Prime earlier this year already wear the Ira name.

It wasn't immediately known what Group 1 plans to do with Prime's management team.

J.P. Morgan Securities analyst Rajat Gupta, in a note to investors last week, called the acquisition "a positive move" that "signals a clear shift" in Group 1's capital allocation priorities to mergers and acquisitions vs. stock buybacks.

He added that conversations with Group 1 management suggested potential for synergistic cost savings and improved profitability metrics and noted that Asbury Automotive Group's acquisition of Park Place Dealerships in 2020 was a similarly priced deal with about $20 million "in potential synergies."

Almost all the dealerships in the sale are part of the GPB Automotive Portfolio limited partnership, which is made up of thousands of investors who raised $682.9 million. Investors were promised 8 percent annual returns, but distributions stopped in late 2018.

It's unclear what will happen to the proceeds from the pending transaction.

A GPB spokesman in a statement said it would "update investors as more information becomes available and provide guidance regarding our plan to distribute net proceeds to investors."

David Muller contributed to this report.