FT. LAUDERDALE, Fla. — Buy-sell activity for auto dealerships this year may come close to levels not seen in a decade, according to The Blue Sky Report from Haig Partners LLC.
Private transactions in the first half of 2014 are up 80% from the number recorded a year ago. Public U.S. auto dealers are on pace to book $1.0 billion in acquisitions for the year (assuming Lithia Motors’ $363 million deal for DCH Auto Group closes by year end), and unlike the past two years, nearly all of the purchases are for U.S. dealerships. If reached, $1 billion in U.S. spending by the public retailers would be an increase of 43% from 2013.
“Dealer profitability sets a new record every quarter,” said Alan Haig, a leading authority on the auto dealer buy-sell market. “Unit sales are growing as the economy continues to strengthen. Because of these factors, dealerships are commanding record high valuations as buyers are attracted to the superior returns on investment compared to other alternatives. There’s a strong appetite for $20 million to $50 million single store purchases, with many buyers looking at $100 million plus dollar platform acquisitions. It may be the best time ever to be an auto retailer.”
In its Mid-Year 2014 Blue Sky Report, Haig Partners found that there had been little impact on buyers’ perceptions of GM dealership values from GM recalls. GM’s unit sales are up 3.4% through July 2014 compared to July 2013, and while that lags the industry’s 5% rise, dealers are booking higher margins on each unit sold.
“Potential buyers we’ve approached with the GM dealership we currently represent are not too concerned about fallout from the recalls,” Haig said. “They think that so many manufacturers have issued so many recalls that consumers are simply tuning out the news. In fact, acquisitions of GM dealerships are up 160% from this point last year, more than almost any other brand.”
Haig cautioned dealers to work quickly to counter the growing threat from Tesla Motors and its challenge to the traditional franchise system. “Tesla is bypassing dealers to engage directly with consumers. As it ramps up production from 35,000 units in 2014 to 100,000 in 2015 and 500,000 after that, Tesla won’t be a niche player for long,” Haig noted. “These sales are going to be taken first from the luxury brands, and then from Honda and Toyota dealers. Elon Musk’s grand ambitions should not be underestimated. Dealers should try to compel Tesla to abide by state laws and award franchises to dealers like all other OEMs.”
Haig Partners’ Blue Sky Multiples were largely unchanged from its First Quarter 2014 Blue Sky Report with two exceptions. Land Rover commands a higher estimated multiple, thanks to a 14% increase in unit sales and high margins for its popular SUVs that put them in the range of Aston Martin, Bentley and Rolls Royce. VW was downgraded as its sales continue to slide, down a dismal 14% from 2013. The company’s strategy of adding dealerships around the country is further depressing profits at existing dealerships, and it still lacks products in the popular truck and crossover vehicle segments.