FORT LAUDERDALE, Fla., and IRVINE, Calif -
While differing on how first-quarter activity unfolded, both Kerrigan Advisors and Haig Partners shared upbeat assessments of dealership buying and selling activity for the rest of 2017 as each used the adjective, "robust."
First, at Kerrigan Advisors, the firm reported that the action of dealerships changing hands “remains robust” for Q1 in spite of slowing vehicle sales and a slight dip in Blue Sky Values. According to The Blue Sky Report, a Kerrigan Quarterly, any negative headwinds are being offset by high dealership real estate prices.
Outpaced by the private companies in acquisition activity, Kerrigan Advisors indicated that publicly traded dealer groups are directing their focus to non-U.S. acquisitions. According to the report, macro-economic conditions, which offer opportunities for both optimism and pessimism, are contributing to a high level of activity in the buy/sell market, which is expected to continue throughout the year.
Kerrigan Advisors managing director Erin Kerrigan said, “2017’s buy/sell market is fueled by diverging viewpoints from conservative sellers and ambitious buyers — and is influenced by consistently high real estate valuations. Those confident in the long-term health of auto retail continue to seek acquisitions and investments.
“By contrast, the pessimists, and those who are generationally ready to go out on a high note, are increasingly choosing to exit the market, selling their dealerships at today’s high prices and avoiding a potential downturn. All of which contributes to a very active and robust buy/sell market,” Kerrigan continued in a news release.
Other key findings from Kerrigan Advisors’ Q1 2017 report include:
—Dealership real estate prices and rents rose considerably on a quarter over quarter basis. Real estate, for most dealers, is their highest value asset, far exceeding franchise value.
—Transaction activity increased slightly in the first quarter of 2017, exceeding 2015 and 2016’s high pace with 60 dealership buy/sell transactions completed in the quarter.
—2017 is tracking towards 240 transactions for the year.
—The number of multi-dealership transactions declined from 19 to 11. Kerrigan Advisors expects the pace of multi-dealership transactions to increase considerably as the year progresses.
—Public retailers’ acquisition spending decreased 12 percent. Since January, The Kerrigan Index, which includes the seven public auto retailers, is down 9.6 percent to 492, underperforming the S&P 500.
—The private sector acquired 93 percent of the franchises sold in the first quarter of 2017.
—Domestics continued to grow their share of the buy/sell market — a trend driven by the growing market share of trucks and SUVs.
—Import luxury franchises’ share of the buy/sell market declined by 45 percent.
The report also identified the following three market trends, which Kerrigan Advisors expects to affect the buy/sell market in 2017 and beyond. That group includes:
—Dealership profit plateau shifts buyer’s focus to current earnings
—OEMs’ buy/sell approval processes differ significantly
—Multiple arbitrage for dealership business lines continues
“Overall, we continue to expect 2017 to be a very active year for buy/sells with private buyers, new entrants and certain public buyers eager to put their capital to work. An increasing number of sellers are coming to market motivated by current prices and a strong desire to capitalize on today’s buy/sell activity,” Kerrigan said.
The view from Haig Partners
Meanwhile, Haig Partners reported that the number of dealerships sold in the U.S. declined 29 percent from 113 rooftops in Q1 2016 to 80 rooftops in Q1 2017, according to data published in the Q1 2017 edition of The Haig Report.
The firm explained this decline may have been partly because of the uncertainty caused by the presidential election in the fall of 2016. Haig Partners indicated buyers were uncertain if Congress would pass tariffs that would raise the costs of most autos sold in the U.S., or if taxes would be cut, thereby leaving more proceeds for sellers.
The report goes on to mention buyers are also increasingly concerned about future profits at dealerships so they are proceeding cautiously. And some sellers have not yet adjusted to new market conditions and may be asking too much for their dealerships.
Continuing the trend from 2016, Haig Partners noted demand for dealerships shifted from luxury and import brands to domestic brands that are heavier in trucks and SUVs. Purchases of domestic dealerships comprised 49 percent of total purchases in Q1, up from 43 percent in 2016.
Purchases of luxury dealerships were just 14 percent in Q1, down from 22 percent in 2016.
Haig Partners’ franchise blue sky multiples were unchanged in Q1.
Other key findings from the Q1 2017 Haig Report include:
—Macroeconomic indicators such as GDP, interest rates, employment, number of miles driven and consumer sentiment remain highly favorable for dealers.
—Other trends such as used car pricing, incentive spending by the OEMs, and rising inventories are growing less favorable to dealers.
—Retail sales are flat for the first four months of the year, although total sales, including fleet, fell by 2.4 percent.
—Declines in new and used gross profits per vehicle are being offset by gains in F&I and fixed operations.
—Sales and gross profits continue to increase at dealerships, but expenses are rising faster.
—Average profits per dealership fell 8.5 percent in Q1 2017 from Q1 2016. The average dealership pre-tax profit over the last 12 months was $1.437 million.
—Average estimated blue sky value per dealership dipped 2 percent from the end of 2016 to $6.92 million.
—Public auto retailers are spending more of their capital outside of core U.S. franchised vehicle dealerships, including stand-alone used car stores, international acquisitions and collision centers.
—Private equity firms and family offices continue to make substantial investments in auto retail.
Haig Partners pointed out that President Trump’s proposed plan to tax pass through entities like most dealerships would increase the amount of after tax income to many dealers by an estimated 24 percent to 35 percent, thereby raising the value of dealerships.
If passed, the firm said dealership values should remain stable or rise, even if pre-tax profits continue to drift lower.
“Despite the sharp dip in the first quarter, we expect dealership sales for the rest of 2017 to be robust,” Haig Partners president Alan Haig said. “There are many buyers, financing is still readily available, and more sellers are realizing that if they want to sell their dealerships before the next recession they will likely need to accept today's offer since tomorrow's offer could be lower.”
Haig Partners is seeing these conditions in its current engagements that include domestic, import and luxury dealerships that range from Florida to New York to California. The value of the transactions they have closed over the past two and a half years is approximately $900 million, including two of the largest transactions of 2016, so they have unique insights into current market conditions and how they impact dealership values.
The Blue Sky Report, a Kerrigan Quarterly, is published four times a year and includes Kerrigan Advisors’ signature blue sky charts, multiples and analysis for each franchise in the luxury and non-luxury segments. The multiples are based on Kerrigan Advisors’ view of franchise values in the current buy/sell market and can be applied to adjusted pre-tax dealership earnings to estimate blue sky value. To download the report, click here.
The Haig Report is published each quarter and is a valued source of information to many in the auto industry who look to it for its comprehensive data, analyses and opinions about the auto retail industry. Included in each edition are Haig Partners' blue sky multiples that serve as a gauge for franchise values. To download the report, click here.