September 7, 2023 — This week, the Asbury Automotive Group filed an 8-K with the SEC, alerting the market it is talking to the Jim Koons Automotive Companies about purchasing its 21 dealerships. 

(UPDATE: Asbury announced it is acquiring Koons — Read more Here.)

The filing most likely was precipitated by the news leaking out on social media late last week. Also, on social media, claims of the transaction price ranged from $3.1 billion to $4.5 billion — none of which is even in the ballpark parking lot. More on that later.

Why Koons is a Smart Addition for Asbury

Koons ranks 23rd on the 2022 Automotive News Top 150 Dealer Groups list — which is based on total new car volume — and generated $3.2 billion in total revenue last year. Based on total revenue, Koons is the 12 largest group in the country. Asbury, which generated $15.4 billion last year, ranks fifth on the Automotive News list — both in new car sales and total revenue. 

Koons, founded in 1964, is headquartered in the Washington D.C. market in northern Virginia. Today, it owns 20 new-car dealerships and one independent used car store in Maryland, Delaware, and Virginia selling Buick, GMC, Chevrolet, Chrysler, Dodge, Jeep, Ram, Ford, Hyundai, Kia, Toyota, Lexus, Mercedes Benz, and Volvo brands. 

Assuming the deal gets done — and that is a big if — and depending on the scope of the transaction (whether it includes all the rooftops — real estate transactions in Tysons Corner can be tricky — is unknown), adding Koons would likely put Asbury third in the nation in new vehicle volume and fourth in total revenue. It also would give Asbury a considerable footprint in the Mid-Atlantic and Northern Virginia region. 

Asbury’s CEO David Hult told investors on the company’s second-quarter earnings call in July that Asbury is aggressively pursuing acquisitions after not buying any stores since December 2021.

“We are aggressively in conversations with acquisitions now. We’ve seen a lot,” he said. “Obviously, we haven’t announced anything because we haven’t been able to land something that meets our criteria in the states and brands that we want. We’re hopeful with our current conversations that something will come together. But as you know, these things take time and you just have to play them out.”

Don’t expect more information from Asbury until a deal is signed or killed. The 8-K filing says, “No definitive agreement has entered into, and accordingly, no assurance can be provided that any definitive agreement will be signed or that any transaction will result from these discussions.”

Potential Transaction Price

Back to the price. We estimate a purchase price for Koons — including Blue Sky, assets, and real estate — will be between $1.1 billion and $1.5 billion, making it the third-largest transaction in history. (We’re basing the price on the industry’s six largest transactions from 2015 — see information at the bottom of this report. Using both Asbury’s and Koon’s financial data and data from previous transactions, a $1.1 billion to $1.5 billion price is within industry norms). 

Calculating the Blue Sky Multiple

People often overestimate the acquisition price when news leaks about potential dealership transactions. 

Dealership valuations are a different animal than valuations in the corporate M&A world — which is why prices paid for dealerships are always less than the store’s or group’s total annual revenue. 

The automotive retail industry relies on “Blue Sky Value” instead of the traditional EBITDA (Earnings Before Interest, Tax, and Depreciation). 

What is this Blue Sky valuation method? Great question. Ask ten dealership accountants or appraisers, and you may get ten different answers. 

The short answer is the blue sky is the amount a buyer pays above the seller’s hard assets, such as inventory and equipment. It is often described as “intangible goodwill.”

The question is, how to calculate that “goodwill.” The starting point typically is the seller’s pre-tax earnings and then determining a multiple of that number. 

We’ll also add here that before the pandemic, buyers typically used the seller’s previous three years’ performance to calculate future profits.  

That is starting to change due to the volatility and unpredictability of the auto industry. Today, some buyers are applying their own earnings to a percentage of the seller’s revenue to project the future profitability of the stores being acquired. 

However, the Blue Sky valuation is determined by much more than the numbers. (Note — below is a high-level view of only some of the factors impacting the Blue Sky calculation. Each transaction is its own book — each valuation is different). 

1. For larger transactions — and, more specifically, transactions in which the buyer is a public group — the overall health of the buyer, including its stock price and ability to finance large deals, along with the expected return on the acquisition, affects the blue sky multiple.
2. Real estate also plays a significant role. But it can be complicated. The less a buyer has to spend on facility upgrades means a higher multiple. And the multiple also goes up based on how much real estate the seller is willing to part with. 
3. Buyer/Seller motivation can be a dominant factor. Included here is whether the seller puts the group out for bid or negotiates with one buyer. 
4. Seller performance. This one is counterintuitive. Often, we hear that poor-performing groups or stores in attractive markets will command higher multiples because of the potential for the buyer to increase earnings. 
5. Strength of the brand(s). For example, a Porsche or Lexus store will drive a higher multiple than a non-luxury brand. (Although, recent prices paid for Toyota stores are mind-boggling). 

Industry’s Six Largest Transactions

Berkshire Hathaway Acquires the Van Tuyl Group — March 2015

• Seller’s annual revenue: $9 billion
• Transaction price: $4.1 billion
• Note: This is the biggest transaction by purchase price and store count in history. 

Asbury Acquires Larry H. Miller Dealerships – December 2021

• Seller’s annual revenue: $5.7 billion
• Transaction price: $3.2 billion
• Note: Transaction included 54 new vehicle dealerships, seven used vehicle dealerships, 11 collision centers, and Total Car Care, a service contract and vehicle protection solution provider.

Sonic Automotive Acquires RFJ Partners — December 2021

• Seller’s annual revenue: $2.8 billion
• Transaction price: $950.2 million
• Note: Transaction included RFJ Auto’s new and used vehicle inventory and parts and accessories inventory. The blue sky and real estate valuation totaled approximately $700 million. Rick Ford partnered with private equity firm Jordan Co. in early 2014 to form RFJ Auto Partners, one of the industry’s first mega private equity and dealership partnerships. 

Group 1 Automotive Acquires Prime Automotive Group — November 2021

• Seller’s annual revenue: $1.8 billion
• Transaction price: $934.2 million
• Note: Group 1 Automotive acquired 28 of the 30 stores owned by troubled GPB Capital Holdings after numerous fraud allegations emerged against the investment firm.  

Asbury Automotive Group Acquires Park Place — July 2020

• Seller’s annual revenue: $1.7 billion
• Transaction price: $889.9 million
• Note: The franchises acquired included 12 new vehicle franchises (eight dealerships) in the Dallas/Fort Worth market: three Mercedes-Benz stores, three Sprinter franchises, two Lexus stores, one Jaguar Land Rover store, one Porsche store, and one Volvo store. The transaction also included the Park Place auction and two collision centers. 

Lithia Motors Acquires Suburban Automotive Group — April 2021

• Seller’s annual revenue: $2.4 billion
• Transaction price: Estimated $700 million
• Note: We’re estimating the price on this one. We’ve heard it may have been higher — $800 million plus. Lithia paid $1,358,900,000 for acquisitions in the second quarter of 2001 — Suburban’s 34 rooftops (56 franchises); Planet Honda, Las Vegas Hyundai Superstore in Las Vegas; BMW and Acura in Sherman Oaks, CA; Southwest Kia Group in Arizona; Herrin-Gear in Mississippi; and Michael’s Toyota and Subaru in Washington.