Dealership megadeal reunites old friends

One of the largest dealership acquisitions in what has been a red-hot year for the buy-sell market can be traced back to a friendship that spans two decades.

Sonic Automotive Inc., of Charlotte, N.C., last week said it plans to purchase RFJ Auto Partners Holdings Inc. in what CEO David Smith called the group's largest acquisition ever.

Years before Rick Ford partnered with Jordan Co., a New York private equity firm, to form RFJ Auto in 2014, he was a regional vice president at Sonic and worked with Jeff Dyke, who is now the publicly traded retailer's president. The two have known each other for nearly 24 years, Ford said, having first met when they worked at a fledgling AutoNation Inc.

"I've always stayed in touch, our kids went to the same college and we both like to hunt and fish," Dyke said. "We just have a great relationship."

With Sonic's $700 million acquisition of RFJ's portfolio of 22 franchised dealerships and 11 used-vehicle-only stores set to close by mid- December, the two men are set to be working together again.

Ford, 58 and CEO of RFJ, will stay on with Sonic as head operator of the RFJ Auto platform.

A mutual connection between Ford and Dyke is ultimately what put the industry's latest megadeal in motion.

This year, Ford said, he was approached by an individual, whom he declined to name, about selling out or merging with his special purpose acquisition company, or SPAC.

The two realized that it wasn't the right fit and a deal didn't materialize.

"He happened to be friends with Jeff," Ford told Automotive News. "And so when Jeff heard that we were at least considering a potential exit or considering doing something, he reached out to me and he said, 'If you're thinking about doing something, we should talk.' And from there, the rest is history."

Ford said he also got to know the Smith family during his Sonic tenure — including Bruton Smith, executive chairman and co-founder of the company; former CEO Scott Smith; Speedway Motorsports Inc. CEO Marcus Smith; and David Smith.

"They're good people to work for," Ford said.

Ford noted that RFJ felt that it could double its size in the next two to three years and was in the process of restructuring its financing to go on what he called a significant growth spurt.

He also said other companies had made offers for RFJ and noted that the group also had considered going public via either a SPAC or an IPO.

But the personal connections to Sonic meant more to Ford. He added that spending some time with David Smith made him comfortable to commit to moving forward with the sale.

"I truly believed that this was the best fit I could ever find for RFJ," Ford said. "That's what was the determining factor." Ford added that Jordan Co. didn't force his hand.

"There really was never a point where we felt like we had to do anything," Ford said. "We were very happy with what we were doing and the returns we were getting."

RFJ Auto, based in Plano, Texas, ranked No. 42 on Automotive News' most recent list of the top 150 dealership groups based in the U.S., with retail sales of 19,705 new vehicles and 28,448 used vehicles in 2020. It generated $2.8 billion in revenue last year.

Sonic was No. 7 on that list, with retail sales of 93,281 new vehicles in 2020 and revenue of $9.8 billion.

The deal is expected to add $3.2 billion in annual revenue. Sonic said in its announcement that RFJ is in the top 15 U.S. dealership groups by total revenue.

The acquisition of RFJ cements 2021 as the year Sonic returned to acquisition mode. It follows purchases of franchised stores in Colorado this summer, which were the group's first acquisitions since November 2014.

In late July, Sonic said it was launching a strategic review of its EchoPark used-vehicle operation.

One analyst who covers Sonic speculated that the EchoPark review could be the precursor to a spinoff of the rapidly growing business.

Sonic has 30 EchoPark used-vehicle stores and delivery centers but aims to have 140 locations nationwide by 2025.

"We still have our existing EchoPark plan that we've already announced. We're moving forward with that," David Smith said. "The RFJ deal really represents Sonic Automotive's return to growing our franchise business."

Sonic's move to acquire RFJ Auto follows Group 1 Automotive Inc.'s pending deal for Prime Automotive Group and Lithia Motors Inc.'s April acquisition of Michigan's Suburban Collection.

Joe Ozog, president of Ozog Consulting Group in Scottsdale, Ariz., expects more megadeals are coming.

The RFJ deal will add six new states to Sonic's footprint: Idaho, Indiana, Missouri, Montana, New Mexico and Washington. It also will add five new brands: Chrysler, Dodge, Jeep, Ram and Mazda.

"This one checked all the boxes with the familiarity with Rick Ford and with the additional locations and entrance into new markets and the strong emphasis that Rick's organization has on used cars," said Mike Sims, president of Pinnacle Mergers & Acquisitions in Frisco, Texas.

J.P. Morgan Securities analyst Rajat Gupta said the move fits well with Sonic's long-term strategy.

"The company has commented in the past that they were looking to do more deals and expand into other regions," Gupta said. "But we had expected smaller deals. In that context, it was a little surprising with the size of the deal. But [it] definitely shows that the company is willing to aggressively expand its franchise network, build a nationwide network and overlay their online platform which they're launching later this year."

Stephens Inc. analyst Rick Nelson described the acquisition as a "whopper of a deal" and the largest revenue generator to change hands in a number of years.

"Sonic was in debt reduction mode," Nelson said. "They had really strengthened the balance sheet. They were pursuing growth with EchoPark, but still had the balance sheet to absorb a business of this size. They want to grow franchised, they want to grow EchoPark, so I think it fit with what they were communicating to us."

Both Ford and Dyke happened to be in Las Vegas last week for a Toyota dealer meeting, allowing the longtime friends to pause and celebrate the deal in person at a hamburger joint.

"We looked at each other and said, 'No one in the world would believe that we're here at In-N-Out having a cheeseburger after doing a deal like this,' " Dyke recalled. "But that pretty much sums the two of us up: just a quick snack and getting back after it."

Melissa Burden contributed to this report.