2 publics going captive route, but 2 others hold off for now

AutoNation announced along with its second-quarter earnings it had struck a deal to buy captive finance company CIG Financial, and Lithia hailed the progress of its captive Driveway Finance Co. in its quarterly discussion of results.

However, the earnings season also saw major publicly traded rivals Penske and Group 1 refusing to follow suit.

AutoNation announced in July it will buy indirect lender CIG Financial for $85 million and convert it into a captive finance company. The deal was expected to close in 90 days, AutoNation said.

CFO Joe Lower called CIG "complementary to an already strong piece of business." It originated $195 million across 12,000 loans last year.

CEO Mike Manley said he sees the acquisition providing "significant upside" over time to the group's strong finance-and-insurance revenue.

AutoNation, of Fort Lauderdale, Fla., ranks No. 1 on Automotive News' list of the top 150 dealership groups based in the U.S., with retail sales of 262,403 new vehicles in 2021.

Litha Motors, whose Driveway Finance Co. has been the only captive among the six major publics, saw "another strong quarter" at the lender, Lithia CEO Brian DeBoer said. The subsidiary wrote more than 14,500 loans and financed $483 million during the second quarter, DeBoer said on a July 20 earnings call.

Driveway Finance Vice President Chuck Lietz said Driveway Finance was used in 9.7 percent of second-quarter transactions, up from 6.2 percent in the previous quarter — enough to make Lithia increase its full-year penetration estimate from 7 percent to between 9 and 10 percent of transactions funded in-house.

Lithia sees an opportunity for Driveway Finance to play a role in 15 to 20 percent of sales — which could be highly lucrative because Lietz said Driveway Finance deals tend to be three times as profitable as the indirect loans Lithia arranges.

Lithia, of Medford, Ore., ranks No. 2 on Automotive News' list of the top 150 dealership groups based in the U.S., with retail sales of 260,738 new vehicles in 2021.

Though their rivals were bullish, the CEOs of Group 1 Automotive and Penske Automotive Group both said a captive finance company didn't fit their auto retail operations.

"It's not at the top of our list right now," Group 1 CEO Earl Hesterberg said on a July 27 earnings call, though he added, "You never say never."

Hesterberg said Group 1 had so many lenders supporting its retail sales "we just don't see any benefit for our company in the near term in taking that kind of step." Spending to add another fixed cost "doesn't seem right for Group 1 right now," he said.

Group 1, of Houston, ranks No. 4 on Automotive News' top 150 dealership groups list, with retail sales of 146,072 new vehicles in 2021.

Penske CEO Roger Penske joined Hesterberg in rejecting the idea of throwing a captive finance company into the mix. He said he has talked to the company's board "many, many times" about the issue in recent years.

"We just don't think, at this time, that a captive finance company really makes sense for us," Penske said.

He said 70 percent of Penske's brands are premium automakers, and such vehicles are often leased or certified pre-owned — reducing the opportunity to insert a captive finance company. Penske's CarShop used-vehicle stores sold too small a volume to make a captive worthwhile, he said.

Penske estimated a captive at his company likely would finance loans averaging 72 months to consumers with credit scores below 700 at a time that delinquencies on retail loan payments are increasing. Holding loans on the books would "blow up your balance sheet," and while Penske would attempt to sell loans to investors as securities, buyers might not be interested, he said.

Penske said he wasn't calling a captive finance company a bad idea or suggesting the group would never own one.

"Right now, we don't think that glove fits our hand," he said.

Penske, of Bloomfield Hills, Mich., ranks No. 3 on Automotive News' list of the top 150 dealership groups based in the U.S., with retail sales of 195,384 new vehicles in 2021.

George Weykamp contributed to this report.