By Alysha Webb, Editor and Publisher
“You ain’t seen nothin’ yet” is the phrase that can be applied to the automotive dealership buy sell world lately. Lithia’s bid to buy DCH Group seemed like a big deal, until Warren Buffett entered the game. Berkshire Hathaway, the legendary investor’s company, announced last week it will acquire the Van Tuyl Group.
The dealership world hasn’t felt a tremor like that since the publics entered the marketplace two decades ago. The entry of an investor of Buffett’s size and philosophy will boost the size of deals in general and could send values to levels never before seen. But opinions are mixed as to the impact Buffett will have on the dealership buy sell world, and how well he will be able to operate in the complex environment.
“I think he will take his stature and make this bigger than AutoNation,” says Kenneth Rosenfield, of Rosenfield & Co. “[Buffett] has big plans and he never does anything in a small way.”
Buffett will go after more huge groups and also do a great job of branding and marketing his dealerships, predicted Rosenfield. Rosenfield & Co., one of the largest independent automotive accounting firms in the country, represents several top 20 private dealership groups.
“He is going to drive values like you’ve never seen,” says Rosenfield.
Some see potential troubles ahead for the new guy on the block, however.
Despite Buffett’s reputation, Mark Johnson, president of M.D. Johnson Inc., questions whether Berkshire Hathaway will be able to rise above other dealership group operators.
Much of Van Tuyl’s operating prowess is a result of Larry Van Tuyl’s personal involvement with the company, says Johnson, including interviewing, hiring, and interacting with the general managers. While Larry Van Tuyl will be chairman of Berkshire Hathaway Automotive, much of the institutional knowledge will slowly be lost, predicts Johnson.
“The dealerships will eventually operate at the same level as every other public company,” he says.
Buffett has made no secret he plans to grow Berkshire Hathaway Automotive group, as the new entity is known. “I fully expect we’ll buy a lot more dealerships. It’s the kind of business we can expand a lot, because there’s 17,000 dealers in the country and we’re buying 78 of them,” Buffett told CNBC.
But if Berkshire Hathaway Automotive is performing at the same level as, say, Penske or AutoNation, then it will face the same restraints as every other group when it seeks to expand, says Johnson.
Those restraints include limits on the number of a certain brand one group can own, and obtaining approval from manufacturers to acquire one of their dealerships. That will likely rub Buffett, who is used to buying whatever he pleases, the wrong way, predicts Johnson. Berkshire Hathaway “will publicly state that they are looking forward to working with the factories, but will have little patience for meddling by the factories in executing their growth plans,” he says.
Brodie Cobb, executive chairman of Presidio Group LLC in San Francisco thinks Buffett’s move will make dealership groups attractive to other large long-term investors. For example, he sees more family offices coming into the market now. Family offices refers to organizations that exist to invest a specific family’s money. Like Buffett, they tend to have long-term investment horizons.
Cobb doesn’t think that will necessarily send values up, however. Family funds tend to be sophisticated investors who are paying “in line with the market,” says Cobb.
It could, however, boost supply by making selling a more attractive option for large dealership groups. “What it does is put a greater spotlight on much larger dealerships that may not have felt they had many liquidity options,” he says.
The Big Bazooka
For those of you who have been camping in the wilderness without access to any news outlet, on October 2 Warren Buffett’s Berkshire Hathaway announced it would acquire Van Tuyl Group. Van Tuyl is the largest privately-owned dealership group in the United States with 78 dealerships. In 2013 it sold 294,013 new and used vehicles, according to the Automotive News list of top 125 dealership groups.
Jeff Rachor, the former COO of Van Tuyl, will become CEO of Berkshire Hathaway Automotive and Larry Van Tuyl will become chairman. The headquarters will be moved to Dallas, Tex. from Phoenix, Ariz. In a press release, Berkshire Hathaway said the new automotive group will be run with “no change to the business model the company has pursued for the last 62 years.”
What Berkshire Hathaway has offered to pay for VanTuyl hasn’t been revealed but the market is putting the total price including all assets and operations at around $4.5 billion including $2.7 billion for good will, said Johnson.
Mike Jackson, CEO of publicly-owned AutoNation, the largest dealership group in the United States, acknowledged Buffett’s acquisition potential, telling the Sun Sentinel newspaper of south Florida, “Somebody finally has a bigger bazooka than me.”
How well Buffett is able to yield that weapon in the complicated buy sell world of automotive dealerships remains to be seen.
