Public retailers go on a buying spree

Publicly owned dealership groups are buying stores and eying more acquisitions, though several are wary about high prices, with a few turning down deals because they say the sellers were asking too much.

Dealership profits during the coronavirus pandemic shot to record levels in 2020, and high profits have continued this year despite new-vehicle inventory shortages. While a boon for dealers, pandemic-fueled profits have created challenges in pricing stores for sale. Some sellers want to use the most recent profits as a basis for dealership pricing — but that's a threshold many buyers, including several of the publics, are avoiding.

Asbury Automotive Group CEO David Hult said pricing is why his group in the past six months walked away from acquisitions of dealerships that could have generated $3 billion to $4 billion in annual revenues.

"We just didn't feel like it was priced appropriately," Hult told analysts in July.

Asbury, however, has signed letters of intent to buy other dealerships that fit well into its location and brand mix and are expected to generate $400 million in annual revenue, Hult said.

The retailer also is reviewing deals for dealerships that could represent nearly $9 billion in annual revenue. Asbury, which bought luxury-brand Park Place Dealerships stores in 2020, has said it aims to add outlets representing $5 billion in revenue over five years.

With interest in deal-making high despite the pricing concerns, dealership buy-sell advisers are figuring out ways to make the transactions work. Several brokers say they are using a mix of the higher profits of 2020 and 2021 and pre-pandemic profits from 2019 to help determine dealership blue sky pricing. Blue sky is a dealership's intangible value, including goodwill.

"A lot of the good private dealerships had record earnings in 2020," said Mike Sims, president of Pinnacle Mergers & Acquisitions in Frisco, Texas. "And then, of those records, a lot of those groups beat that through June of '21. Even those groups will acknowledge that nobody suspects this will continue to go. But as a seller, it's hard to ignore it."

Sims expects the publics to remain active buyers as Lithia Motors' buying spree "has put some pressure on the other publics."

In February, AutoNation, Penske Automotive Group, Group 1 Automotive and Sonic Automotive each indicated they were again on the hunt to buy franchised dealerships and expand store counts.

Since then, they've started to make deals happen.

Group 1 in March bought two Toyota stores in Massachusetts. Penske in June bought a Mercedes-Benz store in North Carolina. Sonic last month bought two dealerships — Subaru and Volkswagen outlets — in Colorado, after a nearly seven-year lull in acquiring franchised stores.

AutoNation in April announced a deal to buy 11 stores in Georgia and South Carolina from Peacock Automotive Group. That transaction is expected to close this summer.

Mark Johnson, president of buy-sell firm MD Johnson in Enumclaw, Wash., said the public groups' buying activity has accelerated.

"The posture with the publics has always been, 'We're always acquirers, but we're not paying any outrageous amounts of money.' Because there's been this long-term belief that [annual industry vehicle sales] would settle down at a lower number," Johnson said. "And it hasn't."

Continued strong sales has meant that publics that "didn't acquire, because they felt prices were too high, missed out on some really good assets," he said.

Newcomer LMP Automotive Holdings, the publicly traded used-vehicle retailer that bought its first franchised stores this year, has announced in the past month that it has deals under contract to buy five dealerships in Texas, Connecticut and New York, all slated to close in the fourth quarter this year. That's on top of other acquisitions that were announced but have not closed.

LMP, which has seven franchised dealerships, has said it intends to have up to 100 dealerships by the end of next year.

All the while, Lithia has remained on a tear, buying 57 dealerships in the first half of 2021, including its super-sized deal for 34 Suburban Collection stores in Michigan, according to Automotive News data. Lithia also sold four stores during the second quarter. The company so far this year has acquired dealerships expected to generate nearly $4.5 billion in annual revenue. Lithia has said that as part of a five-year plan it aims to buy dealerships that will be generating $22 billion in annual revenue for the company as of 2025.

Lithia CEO Bryan DeBoer said last month that the company has deals under contract for stores expected to generate $2 billion in annual revenue and is looking at a "more than $15 billion pipeline of potential acquisitions that we believe are priced to meet our return thresholds."

DeBoer said Lithia has reviewed another bucket of deals with "people that are asking too much money" and "fishing for high numbers" and wanting to price their stores only on pandemic-lifted earnings.

Meanwhile, Sonic will move quickly on its next franchised store acquisition and add more dealerships by the end of the year, Sonic President Jeff Dyke said.

"We've just never been in a position in years to buy franchised stores from a financial perspective, and now we've really shored up our balance sheet," Dyke told Automotive News. "We're in great shape from a liquidity perspective [and] have plenty of access to capital. There are a lot of stores for sale."

Dyke said Sonic will probably add more stores in Colorado to build out its footprint there.

He said he also sees opportunities in the Midwest, Northwest and potentially the Mid-Atlantic region and that Sonic is looking to add stores selling brands and in markets that are underrepresented in its current footprint of 86 franchised dealerships.

Sonic sold one dealership in the second quarter, Momentum Volvo Cars in Houston, but Dyke said Sonic has no plans to sell additional stores.

"We downsized and did all that in previous years," he said. "So the plan now is to grow it."

Penske last month said it is reviewing a deal pipeline representing $700 million to $800 million in annual revenue at what could be either light-vehicle or commercial-truck dealerships.

CEO Roger Penske told Automotive News in July that he expects the group will close on transactions representing $400 million in revenue by the end of the year, though he noted nothing yet was under contract.

"We're probably getting five or six or seven calls a week on opportunities," Penske said.

"Prices are just high," added Penske spokesman Anthony Pordon.

AutoNation in recent months has largely deployed extra cash into buying back its stock, spending some $1.2 billion through July 15 on share repurchases.

CEO Mike Jackson told analysts last month that he chose buybacks in the second quarter "rather than doing a lot of acquisitions that I thought were overpriced."

The largest U.S. dealership group also is spending money to expand its AutoNation USA used- only vehicle stores to more than 130 outlets by the end of 2026. CFO Joseph Lower told analysts last month that AutoNation has a robust merger and acquisition pipeline and will pursue "opportunistic acquisitions."

Group 1, which in July said it bought seven dealerships in the United Kingdom, expects to "announce some U.S. acquisitions in the months ahead," CEO Earl Hesterberg said last month.

Hesterberg said he expects the buy-sell market to "settle down" amid a likely change in the tax environment next year under President Joe Biden's administration.

"We continue to prioritize external growth in our capital allocation process, and we're optimistic that we will have beneficial opportunities as the year progresses," Hesterberg told analysts.

Jackie Charniga contributed to this report.