July 11, 2015 — Headlines in the trade press in January hyped the increasing involvement private equity would play in automotive retail — specifically in the acquisition of dealerships.
On the heels of Warren Buffett’s announcement of that Berkshire Hathaway was buying the 81-store Van Tuyl automotive group (a deal that ended up being for $4.1 billion according to company filings) word leaked during the National Automobile Dealers Assn. convention in late January that George Soros’ private equity fund was considering investing in dealerships. (Read more here: Big Money at NADA, Soros Rumors & Dinners).
Now we’re into the middle of July and there has been little to no action that has been reported from the private equity side with buying dealerships. There have been no big announcements from Berkshire Hathaway or Soros’ fund (which came close to acquiring a large group recently only to have the seller back in the final stages).
Much of the activity is happening beneath the radar and actually dates back to last year. From our conversations with different investment bankers, dealers and brokers, we estimate approximately 30 different private equity/family office type firms have either acquired or are engaged in discussions to acquire dealerships.
According to The Banks Report’s recent 2015 Mid-Year Dealership Buy-Sell Report there have been approximately 40 dealerships (out of 767) that have been acquired by private equity since January 2013 (that number jumps to 120 if we include the Berkshire/Van Tuyl deal). We say approximately, because there are private equity/family office type groups that may have closed on a deal or two this year but have kept their investments quiet for various reasons.
- The most active firms buying or investing in stores currently are the Jordan Company who partnered with Rick Ford to create RFJ Auto Partners (first reported by The Banks Report in November 2014). RFJ has acquired more than 20 dealerships mainly in tier two markets including a Honda dealership in Missouri and a Toyota dealership in Oklahoma.
- A second firm is the New York-based GPB Capital which is helping finance Patrick Dibre’s acquisitions — the most recent being Potamkin’s Honda store in Miami last month. Dibre owns several dealerships from Virginia to New Jersey.
- A third group, Unique Investment Corp., started by John Makoff, acquired three stores last December. The model is to acquire small stores to provide them with negotiating power and back end consolidation. The firm’s specialty is helping robust small businesses grow.
- Earlier this year, Taseer Badar, founder of ZT Wealth in Pearland, TX, bought four dealerships in Fort Walton Beach, FL. ZT had been an investor in Alex Rodriguez’s Mercedes Benz dealership in Houston, TX before selling it to Group 1 Automotive late last year.
(There was a sizable private equity play in 2010-2011 to acquire Chrysler stores in California that has since been dismantled — California Superstores. The players were in Miami last week at the National Association of Minority Auto Dealers (NAMAD) annual meeting looking for more dealerships to acquire.)
Despite the apparent lack of action in the space, we are expecting to see more private equity/family office deals happen over the next several months. The number of conversations that are ongoing indicates the industry should see at least three or four deals come to fruition. Still, that does not add up to a lot of action.
Many of the firms we’re hearing about are focused on larger acquisitions which are much harder to put together. The investment groups mentioned above have employed a strategy of buying one to four dealerships at a time to build their portfolios — deals that are much easier to complete.
One interesting development is the increased willingness of brands such as Toyota and Honda to allow private equity firms come in as owners. In previous years, such brands shunned private equity but already this year. two Honda stores and at least two Toyota stores have been acquired by investment groups (not including the stores acquired by Berkshire Hathaway Automotive).
(Audi recently exercised the Right of First Refusal in a deal in the Northeast blocking a private equity group from acquiring the store).
In addition to certain automakers becoming more willing to allow private equity ownership or investment, the private equity firms themselves are becoming more sophisticated about the industry and the necessity to include proven dealer operators as part of their teams.
The need to have proven management teams in place limits the number of deals that can get across the finish line. Most sellers aren’t interested in working for someone else which means the investment firm has to find others to be part of the team — easier said than done.
Another challenge is in the financing of acquisitions. Lenders today are much more willing to lend money at low rates to dealer groups looking to add stores. Private equity capital is expensive because of the demand for high returns. As a result, they often can be too expensive for the market — especially when lenders are being so aggressive.
For more information on the dealership buy-sell market including access to a list of acquisitions dating back to January 2013, readers can subscribe to The Banks Report.