Auto dealership chains are pursuing new stores and paying pre-recession multiples on acquisitions to expand their networks as the U.S. auto market recovers.
AutoNation Inc., Penske Automotive Group Inc. and Group 1 Automotive Inc. are paying 3 to 5 times earnings before interest and taxes for acquisitions after failing stores were sold during the recession for book value or scrappage prices, said four dealership brokers interviewed by Bloomberg. U.S. new-vehicle sales, which fell to a 27-year low of 10.4 million in 2009, are forecast to rise to 12.9 million this year, reported Bloomberg.
“The economic environment bodes well for dealer M&A activity,” said Gary Silberg, who leads KPMG LLP’s U.S. automotive practice and is based in Chicago. “It’s so hard to do a deal when you don’t know what sales are going to drop to. Now you have stability, and you have growth.”
New-vehicle sales per U.S. dealership this year may rise to levels reached before the recession, auto-dealership consultant Urban Science said last month. Sales per dealer may reach those levels with 3.2 million fewer industry deliveries than in 2007 because manufacturers led by General Motors Co. and Chrysler Group LLC closed locations as part of their bankruptcies in 2009, the Detroit-based firm said.
AutoNation, the largest U.S. auto retailer, this month acquired a Toyota Motor Corp. namesake brand store in Fort Myers, Florida, with annual sales of about $135 million.
AutoNation, based in Fort Lauderdale, Florida, will open six dealerships in 2011 that were awarded by manufacturers and spend $500 million in the three years through 2012 on renovating existing stores, Chief Operating Officer Michael Maroone said.
“We’re clearly in the recovery,” Maroone said in a telephone interview. “It was very difficult to value stores in the downward spiral of the cycle. There’s more confidence that we can look at a store and know what it could do for us.”
The number of U.S. auto dealerships fell 4.4 percent last year to 17,659, Urban Science said. The normal rate of closings was between 1 percent and 2 percent before 2009, when 8 percent of dealerships closed amid GM and Chrysler’s bankruptcies.
AutoNation had 206 U.S. dealerships as of Dec. 31, down from 283 in 2003, according to regulatory filings. Asbury Automotive Group Inc., the Duluth, Georgia-based retailer, has cut 13 stores since 2003, while Group 1 has eliminated 10 stores since 2006.
“The current environment has the advantage of a relatively settled landscape,” said Paul Taylor, chief economist at the National Automobile Dealers Association in McLean, Virginia. “They know which other brands and how many same-brand competitors are going to be in the larger geographic area of a dealership they might think about acquiring. That’s helpful.”
Asbury is better positioned to purchase stores after selling its Nalley Motor Trucks business this month, Chief Executive Officer Craig Monaghan said in an interview. Asbury in December bought a Greenville, South Carolina, store with annual revenue of $125 million.
“We’ve traded assets that aren’t a core strategic competence for a group of stores that are attractive franchises in our market,” Monaghan said.
Group 1 this month acquired a Volkswagen AG namesake brand dealership in Irving, Texas, that may generate $25 million in annual sales.
“Our first and best use of our capital is to grow the company through acquisitions,” said Peter DeLongchamps, vice president of manufacturer relations at Houston-based Group 1. “The opportunities to acquire are clearly better this year than in the last two years.”
Group 1 is pursuing stores selling GM’s Chevrolet and Ford Motor’s namesake brands for the first time since 2005, CEO Earl Hesterberg said in November.
Detroit-based GM’s Buick and GMC are in higher demand, said Bob Morris, a broker for auto dealership sales and acquisitions at Granville, Ohio-based Tim Lamb Group LLC.
Buyers will pay more than 10 times pretax earnings for Mercedes, Bayerische Motoren Werke AG, Toyota or Honda Motor Co. stores in major markets, he said.
“When we get a property like that, it’s like taking a piece of fresh meat and throwing it in a tank of piranhas,” Morris said. D.T. Murphy & Co. in Glen Ridge, New Jersey; Nancy Phillips Associates in Exeter, New Hampshire; and Gordon Page & Associates in Tampa, Florida, also provided estimates for the average multiples dealers are paying for acquisitions.
Pressure on dealers from manufacturers including Ford and Daimler AG for more capital investments in their stores may lead to opportunities for more acquisitions at Penske Automotive Group Inc., CEO Roger Penske said on a Feb. 16 conference call.
Daimler’s Mercedes-Benz drew about $1.4 billion in dealer investments to update U.S. stores as part of a program that began in 2008 and will be completed this year. Ford has asked Lincoln luxury-brand store owners to make renovations of as much as $2 million per showroom, dealers said in October.
“A lot of these owners are thinking now is the time to get out,” Michael Kearney, Asbury’s chief operating officer, said in a telephone interview. “The number of deals reaching ‘conversation mode’ has increased."
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