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Auto Dealer M&A Activity Declines

August 21, 2012

SAN FRANCISCO — The Presidio Group LLC, through its subsidiary Presidio Merchant Partners LLC, today released its “Automotive Retail M&A Market Report” for the first half of 2012. It revealed that auto dealer mergers and acquisitions dropped 55 percent.

After completing $229 million in U.S. dealership acquisitions in the first half of 2011, public companies spent just $103 million to acquire U.S. dealerships in the first six months of 2012, a 55 percent decline, according to corporate filings with the Securities and Exchange Commission and Capital IQ. Acquisition activity by private dealers also appears to have slowed.

The industry views the drop in activity as a fundamental disagreement on price. Buyers see economic and political uncertainty and better uses for their capital, while sellers are experiencing record profits and anticipating continued growth, the report concluded.

Industry multiples have begun to contract as the potential for earnings growth slows. Auto group investors valued public retailers at 12.2x normalized earnings per share in June of 2012, down from 18.2x in June 2011, a 33 percent decline, according to Capital IQ.

As their multiples fall, public companies are less likely to pursue acquisitions in the U.S. market, the corporate SEC filings indicated. Over the past decade, 28 percent of the cash flow from public retailers was spent on U.S. acquisitions. Over the past six months, just nine percent went towards U.S. acquisitions while 51 percent was used to buy back company stock.

According to Automotive News, public retailers are actually shrinking in size, with the total number of dealerships owned by public companies falling from a peak of 884 in 2004 to 744 in 2011.

Multiples on private dealerships appear to also have fallen for many franchises, as buyers are more concerned with risk than earlier in 2012, and are finding other uses for capital.

Despite the decline in acquisitions, trends remain favorable for increasing auto sales due to aging vehicles and easy credit for buyers, with most experts predicting auto sales in 2012 to increase 9 to13 percent over 2011.

Private dealerships appear to be on their way to recording all-time highs in profitability, according to data provided by the National Automobile Dealers Association, and the value of large dealership groups has increased by an estimated 23 percent from 2006.

Dealers are aging and many will want to sell their companies in the next few years, the report stated. Since dealership sales activity has been below normal levels since the beginning of the recession, there is "pent-up demand to sell" that may lead to higher transaction volumes in the future.


 

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