In SPACs, dealers see viable option to go public

The flood of special-purpose acquisition companies on the market has some dealers exploring a new way to take their companies public. If the strategy comes to fruition, it could lead to the first expansion to the ranks of the six publicly traded franchised dealership groups since the last of them, Asbury Automotive Group Inc., went public in 2002.

With SPACs, also known as blank-check companies, on the lookout for investment opportunities, several dealership accountants, lawyers and buy-sell advisers told Automotive News they have clients closely weighing partnerships. Talks involving some dealers have accelerated over the past few months, advisers said.

Going public via a SPAC could provide quick access to capital for a growing group to buy more stores or pay down debt, or give a dealer an exit strategy. The SPAC model also could shave months off the going-public process, accountants said.

"With the amount of activities with the SPACs right now and ... the money that's chasing deals, I think there's a chance we are going to see something," Rick Parmelee, principal of retail dealerships for accounting firm CliftonLarsonAllen in West Hartford, Conn., said last week.

Parmelee's tune has changed from just six weeks ago, when he was skeptical that any dealerships would go public via a SPAC, he said. He has a few franchised clients seriously considering SPACs.

Dealership owners have seen the surge in SPACs over the past year as a number of businesses, including electric vehicle manufacturers and used-vehicle startups such as Shift Technologies Inc. and CarLotz, have gone public.

Parmelee and other dealer advisers said they believe some SPACs are interested in dealership groups because of their strong financial results amid the coronavirus pandemic. The high stock prices of some public auto retailers, the market's interest in public used-vehicle disrupters and Lithia Motors Inc.'s attention-getting dealership acquisition strategy also bolster the investment play.

"For a lot of these folks, it looks like there's still a lot of room to do roll-ups before the space gets too crowded," Parmelee said.

Several advisers said a group likely would need at least 20 stores representing multiple brands to make sense to go public via a SPAC.

Rick Ford, CEO of RFJ Auto Partners Holdings Inc., with 28 franchised dealerships and a dozen used-vehicle stores across several states, said his company has had some conversations with "people who've reached out to us from the SPAC world."

While RFJ, which ranks No. 43 on Automotive News' list of the top 150 dealership groups, has had those discussions, "at this moment we intend to stay private," Ford said.

But Ford said he could see SPACs — specifically ones attracted to dealership groups at the forefront of digital retailing and omnichannel efforts — playing a role in dealership consolidation. Omnichannel refers to digital shopping technology that seeks to provide a seamless buying experience for consumers, whether they shop online, in-store or both.

Ford said he expects dealership consolidation to intensify in the next few years to a pace similar to that during the late 1990s and early 2000s when the six public groups formed.

LMP Automotive Holdings Inc., a Fort Lauderdale, Fla., used-car retailer and vehicle-subscription provider that went public through a traditional initial public offering in late 2019, also aspires to roll up franchised dealerships. LMP hasn't closed franchised-store deals yet but has contracts to purchase eight dealerships in three states. It terminated other franchised deals, including an agreement to buy a 70 percent stake in Atlantic Automotive Group dealerships in New York.

Last month, auto retail veteran and entrepreneur Franklin McLarty took blank-check company MDH Acquisition Corp. public. His Southlake, Texas, firm is seeking businesses in what it described as the "heartland region" of the U.S. and in a variety of industries, including transportation and automotive. McLarty said that while his firm is open to automotive retail as a target sector, it likely isn't interested in traditional franchised dealerships.

But others are, and Louis Mannello, a partner in the advisory practice for accounting firm Dixon Hughes Goodman, which has worked with companies targeted by SPACs, said dealership owners are "thinking about it."

"There's been too much notoriety, too much success, frankly, money flowing in, for dealers to ignore it," Mannello said.

Jon Hansen, a partner in DHG's audit practice in Charlotte, N.C., said the used-vehicle companies that have gone public via a SPAC are showing a path for franchised dealerships. Hansen said DHG is talking with a few franchised clients about SPACs, but none is at the point of actively looking to pair with one of the companies.

SPACs typically must acquire or merge with a company within two years of going public or return the money they've raised. Many seek companies in growth mode.

Stuart McCallum, who leads the automotive consulting and accounting practice for accounting firm Withum of Princeton, N.J., said he's working with three auto retail clients that are targets of SPACs. He declined to share more, other than saying that one of the potential pairings could involve franchised dealerships.

Dealership lawyer Aaron Jacoby, managing director for law firm Arent Fox in Los Angeles, said he has two franchised clients interested in using a SPAC to roll up dealerships. Another dealership lawyer, Stephen Dietrich, a partner with Holland & Knight in Denver, said he's had a half-dozen or more franchised clients talk with him about SPACs since the fall, with two clients "really digging into it to see if it would make some sense."

Those two clients have had initial conversations with SPAC sponsors, Dietrich said, and something could happen this year.

Parmelee said a SPAC could be a tool for larger groups trying to maximize their selling price. It also could provide an exit for a family-owned group without a successor, he said, adding that a management team unable to buy out ownership could retain operational control in a going-public-via-SPAC scenario.

But there are possible negatives, too, advisers said, such as being in the public eye, answering to a board of directors and shareholders and adhering to regulatory requirements and more stringent accounting and auditing standards.

"It's a whole other layer of administration to be a public company," Dietrich said, adding the auditing alone could cost several hundred thousand dollars a year depending on group size.

Combining with a SPAC likely would take at least four to six months for an auto retailer that has the needed audited financials, advisers say. A major hurdle is getting necessary automaker approvals, Parmelee said.

Some advisers cautioned that SPACs may not be the right choice for dealerships looking to grow or exit.

Jacoby said SPACs may be a vehicle for private equity firms to invest in auto retail by partnering with proven operators approved by manufacturers.

Erin Kerrigan, managing director of Kerrigan Advisors, an Irvine, Calif., sell-side firm, said her firm has spoken with people exploring or forming SPACs targeting auto retail. "Our expectation is with the rise in the SPAC structure, our trillion-dollar auto retail industry could see a SPAC that could end up buying a dealership [group] or two," she said last month.