Store Buyers Back in Game

Auto dealers hoping to add to their portfolios by picking up stores on the cheap, may have missed their window of opportunity 舒 what little window there was.

As sales began plunging in the summer of 2008, well-capitalized dealers eyed the market expecting to pick off weaker dealerships at bargain prices.

But then Lehman Brothers collapsed on September 15 and suddenly, even strong dealers found themselves overwhelmed by the resulting tsunami of changing and more restrictive credit rules that have yet to ease. At a time when dealers should have been buying stores, they were scrambling to avoid violating loan covenants with their floor plan lenders.

“The dealers who would have been buyers even had that ‘deer in the headlights’ look last year,” says Sheldon Sandler, founder of Bel Air Partners, an investment banking firm representing dealers in buy/sell transactions.

While the “deer in the headlights” paralysis has mostly disappeared, dealers still are exercising caution when evaluating whether to buy.

Pricing is still an issue for dealers, but it's not at the top of the scale, says Mark Johnson, president of MD Johnson Inc., a national merger, acquisition and advisory firm.

“The concerns now are more about borrowing, increasing floorplan and renewal rates on mortgages,” he says. “Dealers are asking, ‘How is this (acquisition) going to affect my overall business? What will be my exposure? That's a big barrier to getting people to move.”

Offsetting the lack of demand is the decrease in supply 舒 which is keeping dealership prices from plummeting lower 舒 created by General Motors Co.'s and Chrysler Group LLC's elimination of more than 2,000 dealerships, taking many potential sellers out of the market.

Adding to the lack of supply, ironically, is the underlying health of the automotive retail sector, Sandler says. “Many dealers have found they can make money in what has been a difficult environment. This is a variable- cost business, and dealers have been able to adjust.”

Phil Villegas, a principal with Dealer Transactional Services LLC, a firm that handles the buying and selling of dealerships, agrees, saying, “If you're stable, with money in the bank and are squeezing out at least a small profit, there's no real incentive to sell.”

The result, Sandler says, is that dealers don't want to sell right now with depressed multiples and trough earnings. The dealers who are making money have decided to wait out the downturn.

Would-be buyers have been making offers, but often those offers are so low, they almost insult the potential seller, says one dealer group executive.

Johnson says the industry has seen the bottom with dealership prices, bad news for “anybody that thinks they are going to wait around and get a low price.”

Sandler says blue sky values will rebound, driving dealership prices up once the industry sees three or four consecutive months of increasing sales.

Blue sky refers to the value a buyer and seller might place on a dealership once the value of the hard assets are determined. It typically is calculated by multiplying a dealership's pre-tax earnings by a multiple.

The multiple is a highly subjective number and takes into account several factors, such as brand, market, location of competitors, facility condition, size of vehicle allocation and store history.

Villegas believes there are still deals to be had, though. “The only deals we're seeing today are distressed deals 舒 ones in which the dealer has to sell,” he says. “And we'll see more of those deals in the near future.”

Many of these deals are at prices 30% lower than what they might be in a normal time. Dealerships selling brands such as Mercedes-Benz, Toyota and Honda have been picked up for near steals in recent months.

The success of “Cash for Clunkers” may have helped some dealerships survive for the time being, Villegas says. The reality is, it may have granted stays of execution rather than long-term survival.

Another factor that likely will begin driving dealership prices back up are the public dealer groups, which earlier this year were looking to sell stores to raise cash to avoid violating loan covenants with lenders.

Now, the public companies are looking to buy. Mike Jackson, head of AutoNation Inc., says the chain is looking for deals. Executives at other groups are quieter about their plans, not wanting to drive up prices. But many say privately they are nearing acquisition mode again. That's because investors want to see growth, Sandler says.

From here on out, many brokers and executives agree, the most attractive deals are going to be the distressed dealership.