Buffett's Dealer Group Buy Still Creating Ripples


Two blockbuster dealer group acquisitions this year - Berkshire Hathaway's purchase of the Van Tuyl Group, along with Lithia Motors buying DCH Auto Group - are proving to be game-changers on the mergers and acquisitions side of the retail auto business.

As Erin Kerrigan, founder and managing director of Kerrigan Advisors, said in her firm's latest look at dealership buy/sell activity: "These two mega deals have motivated a new wave of sellers to consider entering the market, while also pushing pricing expectations to peak - and likely unsustainable - levels."

A synopsis of the Q3 Kerrigan Quarterly Blue Sky Report indicates that price expectations in dealership acquisition are at "record peaks," with the Berkshire Hathaway-Van Tuyl deal - the largest in auto history - playing a major role in that run-up.

Not long after that Berkshire deal was announced, an analysis from Sageworks, a financial information company, examined the financial conditions of privately held auto dealers, in particular, and why some of their traits would entice an investor like Warren Buffett and Berkshire Hathaway. The analysis shares an interview quote from Buffett in which he describes well-run dealerships as "a very good business."

In late October, Auto Remarketing talked with Sageworks analyst Libby Bierman about that notion and what attributes may lead someone like Buffett to have such an outlook on privately held dealers.

"Certainly, I'm sure Warren (Buffett) and other investors are looking at things outside of financial performance, whether that's who the management is, business projections, plans for that business, etc. But when you're looking at, particularly our financial information - so, the net profit margin and sales growth for these industries - they look like pretty sound industries.

"What you don't see is negative sales growth since the recession. You continue to see above-average sales growth, so they're bringing in more, as well as that stable net profit margin," she said. "It's not super high; they're not the most profitable of industries. But the fact that it's consistent, it's more of a steady-Eddie type of investment than maybe some of the higher-risk investments these guys might be considering."

Going back to the Kerrigan report, the firm - citing its own data and that of The Banks Report - said there were 148 completed dealership transactions year-to-date through Oct. 1. That's nearly double the 78 transactions done through the same period of 2014.

Berkshire Hathaway's purchase of Van Tuyl was announced on Oct. 2, and since then, "the number of dealers considering a sale has increased considerably," the Kerrigan report says.

In fact, the firm is projecting buy/sell activity to remain elevated for the rest of the year and most of next year. The report also mentions that private buyers are leading the pack by a wide margin.

 "It is not surprising that private capital is seeking financial exposure to auto retail. These investors see a profitable, fragmented industry with tremendous consolidation opportunities (the top 125 dealership groups represent only 25 percent of industry's sales)," said Ryan Kerrigan, who will be leading the new private equity and family office advisory at Kerrigan Advisors.

"They also see attractive exit opportunities in the public markets through a future IPO (auto retail's stock market capitalization relative to market size is one of the smallest in our economy)," he continued. "Private investors also see opportunity in a changing industry in which online sales, no haggle pricing, and new forms of car ownership create attractive new business models that are less reliant on expensive human capital," he concluded.