Why LMP Automotive's dealership acquisition goal is fizzling

Small, publicly traded LMP Automotive Holdings Inc. had a goal to roll up dozens of dealerships. It stumbled on a few deals, bought eight franchised stores last year, entered into numerous contracts for more and even purchased a $5.6 million airplane.

But now those deals are collapsing. LMP is exploring alternatives, including selling its portfolio of franchised dealerships and four used-vehicle centers after it was unable to secure financing to close seven pending transactions. Combined, those transactions would have cost the fledgling company more than $296 million.

LMP CEO Samer Tawfik said in a news release Wednesday that the Fort Lauderdale, Fla., retailer planned to terminate those deals, which the company less than two weeks earlier had said would begin closing this month.

"Given the record M&A activity in our sector and multiples being paid for these transactions, LMP's board of directors has directed management to immediately pursue strategic alternatives, including a potential sale of the company," Tawfik said in the release.

A corporate governance expert says LMP's financial statements show a company that is highly leveraged and in a highly stressed financial situation.

"In the investment banking/M&A world, 'explore strategic alternatives including a possible sale' is a code word for SOS," said Erik Gordon, a professor at the University of Michigan's Ross School of Business. "The ship is sinking. We've got to find somebody to bail us out. So you might have a double whammy here: Not only do you not have the money to close the deals that you are committed to, but your failure to close those deals means you are — in some cases, if they're big deposits — forfeiting the deposits."

Automotive News reported this month that seller Steve McGavock of McGavock Auto Group in Texas was keeping a $1.5 million deposit after LMP's deal to acquire five of his stores fell through Jan. 31. It marked another significant derailed transaction for LMP. Its highest-profile deal, to buy a majority stake in 16 dealerships from Atlantic Automotive Group, was cut to eight stores before that deal ultimately was scrapped last year.

LMP said in a regulatory filing Thursday, Feb. 17, that one of the seven pending acquisitions, Chantz Scott Chrysler-Dodge-Jeep-Ram in Greeneville, Tenn., announced in August, had been terminated.

LMP "did not incur any material termination penalties pursuant to such termination," it wrote in the filing. That purchase agreement included a $250,000 earnest money deposit, according to an August regulatory filing, and it wasn't clear last week who got that money. J. Chantz Scott, CEO of Chantz Scott Auto Group, did not respond to requests for comment.

In a Friday regulatory filing, LMP said its $29 million agreement to buy property in Elmsford, N.Y., to relocate and expand one of its dealerships in New York was terminated. LMP, in the filing, said canceling the deal didn’t include any “material termination penalties.”

Whether LMP will lose earnest money deposits in other transactions that are axed — with at least one deposit in the seven figures — is murky, as it depends on specific contingencies in each agreement and on whether there was a default, according to dealership lawyer Leonard Bellavia, a partner in Bellavia Blatt law firm in Mineola, N.Y.

LMP's Tawfik and COO Richard Aldahan did not respond to requests for comment, nor did the company's lead independent director.

Of the pending transactions, the largest in terms of rooftops included buying an 85 percent stake in 10 new-vehicle dealerships, a used-car center and a fleet operations outlet from Alan Jay Automotive Network in Florida. LMP was going to pay $50 million for the dealerships' goodwill and about $44.1 million for real estate.

Seller Alan Wildstein declined to comment, as did Ryan Kerrigan, the seller's broker and managing director of sell-side firm Kerrigan Advisors in Irvine, Calif.

Another of its pending deals was the planned $9 million-plus purchase of Kia of East Hartford in Connecticut from Joseph Klimas Jr. and K&W Enterprises.

Broker Gordon Wisbach Jr., president of GW Marketing Services in Newton Centre, Mass., told Automotive News that his client wants to retire. The deal was originally announced in July, and the parties had extended the closing date by a couple of months and agreed to a higher purchase price, Wisbach said. Wisbach declined to disclose that amount.

"It's a shame because Sam really wants to do this," Wisbach said. "We liked working with him to buy the store. It's disappointing that he couldn't get the financing."

Wisbach believes he can find another buyer. And another broker thinks other sellers with canceled LMP deals will, too.

"This is still one of the busiest times in M&A history," said Dave Cantin, CEO of Dave Cantin Group, whose DCG Acquisitions firm represented one seller in a transaction with LMP that didn't close. "With recent historical profits, all sellers involved in one of LMP's transactions will hopefully find a new suitable buyer that has an ability to execute a successful closing."

In late December, Tawfik said in a news release that LMP had "engaged Bank of America" to help it refinance debt, and this month he said in another release that LMP was working with "prospective lenders to provide the necessary debt financing" to acquire the dealerships.

In its news release this week, LMP said its board of directors feels its stock price is undervalued; Tawfik owns about 35 percent of LMP's stock, according to the company's December proxy statement.

Shares of LMP fell 26 percent from close on Tuesday, Feb. 15, before the news to $4.95 on Thursday, Feb. 17; a year earlier, the shares were trading for more than $20.

"Some of the big public companies are making very substantial acquisitions, and that tends to influence investors, but in this case, [LMP] never really had the capital base to be as aggressive as they were," said Sheldon Sandler, CEO of Bel Air Partners, a buy-sell advisory firm in Hopewell, N.J., which has written about LMP but is not involved in any transactions with the company.

Sandler said that should LMP need to sell its existing dealerships, he would expect it could get a good price for them given the overall strength of the buy-sell market.

LMP itself likely could have multiple suitors, and not just the nation's six large, publicly traded dealership groups, said David Whiston, an analyst with Morningstar in Chicago who covers public auto retailers but not LMP. Whiston said the consolidation in auto retail has created dealership buyers in large and midsize privately held groups.

At the end of September, LMP had $29.7 million in cash, including about $10.9 million in restricted cash.

Through the first three quarters of 2021, LMP generated $1.1 million in net income. The company plans to release fourth-quarter results March 31.

In October, LMP bought an airplane, spending about $5.6 million, according to a regulatory filing. It signed a $3.2 million, five-year note for the plane, and monthly payments of $32,435 were set to begin in December, guaranteed by Tawfik. To help pay for the plane, LMP received $2 million through a credit line from ST RXR Investments, a related company owned by Tawfik. That credit line was set to mature on Nov. 21, 2021, and required payment either on that date or on demand, according to the filing.

It is not clear from the regulatory filing why LMP purchased the plane.

"No investor, no lender, is going to look at that airplane and think that that's good corporate governance," said Gordon, the U-M professor. "It's a bad signal. It is not the No. 1 — it's not the No. 10 — good use of cash for this company."