Buy-sell action likely to rebound after falloff

The number of dealership buy-sell transactions fell sharply in the second quarter from a year earlier, likely over tariff and economic concerns, and because the six public auto retailers were largely absent from the acquisition market, according to two publications that track the number of deals.

An estimated 49 dealerships were sold during the April-to-June period, down 60 percent from the second quarter of 2018, marking the slowest quarter since 2013, according to the Haig Report, published by Fort Lauderdale, Fla., buy-sell advisory firm Haig Partners. For the first half of the year, the firm's president, Alan Haig, believes sales of dealerships are off 34 percent from a year earlier.

Haig said the early-year government shutdown, concerns over tariffs and trade and even the polar vortex over the winter led to the slow second quarter. He believes few deals were signed in the first quarter, so not many transactions happened in the second quarter.

"Buyers just kind of halted for a little bit," Haig told Automotive News.

But with buyers' confidence up, dealership profits slightly on the rise and interest rates falling, he expects buy-sell activity to pick up again. He said he has a number of closings scheduled for the third quarter.

"Our pipeline of transactions is higher than it's ever been," he said.

Erin Kerrigan, managing director of Kerrigan Advisors, a sell-side firm in Irvine, Calif., that publishes the Blue Sky Report, said deals often take six to nine months to put together and close. Kerrigan thinks the sell-off in the stock market late last year and lower stock prices for the public auto retailers then were factors in the buy-sell slowdown.

"The publics weren't really in the market in the first half" of the year, she told Automotive News.

Her firm estimated 49 transactions — which could involve multiple stores in one deal — closed during the quarter. For the first half of 2019, 103 buy-sell deals closed, down nearly 10 percent from a year ago, according to the Blue Sky Report. Kerrigan expects the pace of transactions will lead to a sixth-consecutive 200-plus year.

Brady Schmidt, president of National Business Brokers, a buy-sell firm, in Irvine, Calif., also noticed the drop-off in closings in the second quarter. He pointed to worries about a recession and dealership profits falling as reasons for pause by some buyers.

"What ended up happening is stores recovered, profitability recovered, and buyers loosened up and started to buy because they realized the [dealership] prices weren't necessarily going to drop," Schmidt said.

His firm, however, took on more new listings during the three-month period than in any quarter during the past six years. And Schmidt said his third quarter is already off to a strong start, with three closings scheduled, and he expects to have five or six more deals close in the fourth quarter. He also has seen a spike in website traffic over the past 60 days with more buyers showing interest in dealerships, including first-time buyers and professional money such as family offices.

Single-point stores and domestic franchises made up more of the deals that closed during the quarter than usual, which Haig thinks points to some buyers being "more risk averse" and looking for dealerships to tuck into their portfolios.

While Kerrigan noted there were more single-store transactions in the quarter as some dealers may have opted to prune underperforming franchises, "we still believe that we're going to continue to see large groups sell and groups be acquired more and more by new capital entering the market."

Both Kerrigan and Haig reported that National Automobile Dealers Association data as of June indicates the average privately owned dealership saw profits increase 0.6 percent over the trailing 12 months to $1.37 million, after three years of declines.

"That is a really loud message to the marketplace that this is a really great place to invest," Kerrigan said.

Lithia Motors Inc. is believed to be the only publicly traded auto group to buy any dealerships in the second quarter, as the publics continued to be net sellers.

Lithia, of Medford, Ore., spent $101.4 million on two dealerships, according to a regulatory filing. It bought Freedom Ford-Lincoln of Morgantown, W.Va., from Michael Wood — renaming it Ford-Lincoln of Morgantown — and Hamilton Honda in Hamilton Township, N.J., from auto industry veteran Michael Saporito and former NFL linebacker Jessie Armstead.

The publics spent less than $230 million during the first half of the year on dealership acquisitions, down from $500 million during the same period of 2018, according to Haig's report. He believes the spending level — on target for the lowest amount since 2010 — is tied to their lower stock prices until recently.

In the first quarter, Asbury Automotive Group bought the four-store Bill Estes Automotive in Indianapolis for $121 million.

Kerrigan and Haig both expect the publics to boost their acquisition spending in the second half of 2019 and into 2020, now that their stock prices have rebounded.

Lithia already has continued its purchases into the third quarter, announcing it had acquired its first Jaguar-Land Rover store, Jaguar-Land Rover Mission Viejo in Mission Viejo, Calif., from Pendragon. Last month, the nation's third-largest auto retailer also said it bought Hazleton Honda in Hazle Township, Pa., from Saporito, Armstead and Antonio Pierce.

The Haig Report noted that since January 2016, Lithia has purchased 54 stores, more than the other five companies' acquisitions combined. And Haig noted that Lithia has had the best stock price growth of its peers in the past three years.
"Lithia is adding value to its company by continuing to acquire dealerships and improving their performance post-closing," the Haig Report said.