By Alysha Webb, Editor and Publisher
Publically-owned dealership groups are in the market this year if the franchise suits their strategic vision. While earnings are important, they aren’t enough to seal the deal. Executives from AutoNation Inc. and Penske Automotive Group Inc. talked with Automotive Buy Sell Report about how they decide which stores to acquire, and their general acquisition outlook for 2014.
Both groups were very profitable in 2013. AutoNation has more than 200 franchises in the U.S. In 2013 it had revenue of $17.5 billion, up 12 percent compared to the previous year. Penske had 327 franchises worldwide at the end of 2013. Its 2013 revenue was $14.7 billion, up 12.4 percent on-year.
Acquisitions played a role in both groups’ growth. Penske, the second largest dealership group in the U.S. based on revenue, did only a few deals in 2013. But those deals brought in $800 million in acquired revenue, said Anthony Pordon, the group’s executive vice president in charge of investor relations and corporate development.
For 2014, “the pipeline of deals is very good,” he said. It helps that Penske’s “sandbox for transactions” is very large, including Western Europe and Australia and New Zealand. Nearly half of the Group’s 327 franchises are located outside the U.S. “The international market does not scare us,” said Pordon.
Regardless of where it is shopping, there are three things Penske looks at when making a purchase decision: Brand, market, and the opportunity to leverage its existing operations, said Pordon.
It prefers stores in areas where it is already present, he said. That way it can leverage its back office and advertising operations to achieve additional operating efficiencies. If Penske doesn’t have any stores in an area, it prefers to buy scale in that market, he said.
Its acquisition in March of a BMW store in Greenwich, Conn. was an example of both strategies. The acquisition included the main store and a satellite sales location and service division in Pt. Chester, Conn. Penske also has Mercedes-Benz, Audi, Porsche, and Honda stores in Connecticut. The BMW store will bring in an additional $190 million in annual revenue.
As for Penske’s approach to transactions, it prefers them to be negotiated, said Pordon. “We do not get into bidding wars,” he said. “Nobody wins in a bidding war.”
From a seller’s standpoint, there are also factors besides price that make a deal successful, says Mark Johnson, president of MD Johnson Inc., a financial advisory firm to dealers. His team considers who shares the client values and who really loves the brand, among other factors, said Johnson.
“We want to put people together who are like minded, who will want to work together after the sale. That brings the most value to the seller,” he said.
Capital expenditures loom large for AutoNation
AutoNation is the largest dealership group in the U.S. and one way it achieved that scale is by being very acquisitive. In the past six quarters it has bought 12 stores, said Jonathan Ferrando, executive vice president of corporate development. This year should be a similar environment, he said.
“There is a solid pipeline of deals out there and sellers coming to market,” said Ferrando. But he wouldn’t predict how many deals would actually get done. “For those who are ready to sell, are they realistic on price?” he said.
AutoNation aims to offer consumers every major brand in the markets in which it operates, which are California, Florida, Texas, Virginia, and Maryland. “The brand is a key multiple,” he said.
It will also consider secondary locations in new markets if the store’s location and facility are good, said Ferrando. Existing cash flow is important, as is how AutoNation can use its enormous size to improve the store’s business. It also considers other financial indicators such as EBITDA and return on investment cash.
Capital expenditures are “a huge question in valuation,” said Ferrando. Many automakers are requiring their dealers to undertake expensive upgrades, and capex is an issue in ¾ of AutoNation’s purchases, he said. “We view the upgrade as an additional blue sky,” said Ferrando.
Less tangible factors also play a role in the purchase decision, however, such as the dealership’s culture and reputation. That means the dealer has a good reputation with customers and employees, and “approaches business in a transparent and customer-focused way,” he said.
It is hard to hide a bad reputation from AutoNation because “most of these deals are in our markets so we are pretty well aware of their reputation,” said Ferrando.