Publics adapt as buy-sells rev up

As the buy-sell market heats up, the public dealership groups are mostly taking a measured approach: Sell underperforming stores, and bid on the most lucrative ones.
Penske Automotive Group, Lithia Motors, AutoNation and Group 1 Automotive continue to add dealerships while selling underachieving stores. Sonic Automotive has been selling stores, while Asbury Automotive Group has been primarily a buyer.

In the fourth quarter, Penske, the nation's second-largest retailer, sold two Lexus dealerships in New Jersey — Lexus of Edison and Lexus of Bridgewater — and acquired two Lexus stores in the Austin, Texas, market, CEO Roger Penske told Automotive News last month. Under its framework agreement with Lexus, Penske Automotive can't add stores without selling some.

The Lexus acquisitions add to Penske's market presence in Austin, where it has Toyota, Hyundai, Honda, BMW and Mini stores, plus a central office. Penske is bullish on Austin, citing job growth expected by major companies. The company will gain $125 million in annualized revenue from Lexus of Austin and $70 million from Lexus of Lakeway.

In October, Penske also opened a Jaguar-Land Rover dealership in Englewood, N.J., with expected annualized revenue of $40 million.

"We will be opportunistic in our acquisition strategy as we go forward," Roger Penske said. "And to me, that's going to be key because we're going to try to grow in markets where we have scale."

Lithia, the fourth-largest auto retailer, is looking to grow its footprint in 2019. CEO Bryan DeBoer this month said the company is "focused on finding average performing or underperforming stores that haven't realized their potential yet."

In 2018, Lithia bought the 11-rooftop Day Automotive Group in Pittsburgh and six dealerships from Prestige Family of Fine Cars in New Jersey, and made two smaller acquisitions. The group also opened a Chrysler-Dodge-Jeep-Ram dealership in Corpus Christi, Texas, and separated a Subaru franchise into a standalone store in Utica, N.Y.

Group 1, the third-largest dealership group, in the fourth quarter opened Sterling McCall Acura Sugar Land, a new store in the Houston market expected to generate $40 million in annual revenue. In January, Group 1 opened Porsche of El Paso in Texas, which will add $25 million in yearly revenues.

This month, Asbury, the nation's seventh-largest auto retailer, said it signed an agreement to buy the four-store Bill Estes Automotive Group in the Indianapolis market. The transaction is set to close by the end of March, and the stores are expected to generate $250 million in annual revenue.

"The Asbury leadership team believes that our company will be a good steward of this family business that has a long legacy of quality service in the Indianapolis market," Asbury told Automotive News.

Asbury CEO David Hult said the buy-sell environment is more active now than it was at any point last year.

"What that means from a net standpoint to us — if we're going to add one or 14 stores — I really couldn't tell you," he said. "It's very easy to acquire some. It's much harder to run it, so we want to be thoughtful."

Last year, Asbury acquired a Chevrolet store and a Toyota store in the Atlanta market and a Honda store in the Indianapolis market.

AutoNation, the largest new-vehicle retailer, acquired Shelly BMW in Southern California last year, with annual revenue of $140 million. AutoNation also was awarded four Jaguar-Land Rover open points in Florida, California, Texas and Maryland. The combined annual revenue for the stores is $400 million.

AutoNation during the first nine months of last year was mostly a seller, divesting eight domestic, five import and two luxury dealerships.

CFO Cheryl Miller told analysts last week on a call that additional sales are likely in 2019, though perhaps fewer than in recent years.

While the publics are buying stores that fit their business profiles, they're also selling others.

Sonic, which sold three stores that needed upgrades to meet factory mandates last year, also sold two more in January that automakers wanted moved into new facilities, Sonic President Jeff Dyke told Automotive News last week.

"They wanted us to buy property and build new buildings and you can't find a more expensive place on the planet to buy property and build buildings than in the [Washington] D.C. area," Dyke said. "The answer's no. We're just not going to do that."

The two stores represented $240 million in annual revenue, but Sonic said it couldn't justify the expected return on the required investments.

So the fifth-largest U.S. auto retailer sold the Lexus and Honda stores to Graham Holdings, an Arlington, Va., conglomerate.

In 2018, Sonic sold a total of seven franchised dealerships. In addition, Sonic opened a Land Rover dealership in the Atlanta area and terminated a Cadillac franchise in California.

Lithia shed eight dealerships last year. Penske also said it's carefully looking at underachieving stores with deteriorating profits that may need facility updates. The company is weighing whether to invest or sell those stores.

Group 1 in the fourth quarter sold a Volvo franchise in Columbus, Ga., and in January sold a Hyundai franchise in Kansas City, Kan., and a Mazda store in Houston. The stores weren't providing expected returns on capital, Group 1 said.

Group 1 CFO John Rickel told Automotive News the company would like to expand its store portfolio but is somewhat constrained by its stock valuation.

"If you look at where our stock trades versus what expectations are from private sellers right now, our stock is a better value in most cases. So we'll continue to be opportunistic. We're looking," he said. "People continue to bring us deals, and they should because we want to look at them. But we have to find a value that works for us and our shareholders as well as the seller."

Rickel said Group 1 has a "small handful" of stores it plans to sell.

"We're looking for appropriate returns on our investments. And if we have an asset that's underperforming, we investigate it," Rickel said. "If there's ways to fix it, we will. But ultimately, if it's not delivering the appropriate shareholder return, we're going to take an action. Sometimes that includes selling the assets."