George Karolis (below, left) is president of the Presidio Group, which recently served as exclusive adviser to Dallas-based Park Place Dealerships, in a $735 million acquisition by Asbury Automotive Group of Duluth, GA. The Presidio Group has offices in San Francisco and Duluth, GA.
Asbury had canceled the original, $1 billion deal in March due to coronavirus-related shutdowns. A restructured deal has since been worked out.
Real estate had accounted for $215 million of the original purchase price. In the final agreement, Asbury also didn’t buy a group of ultra-luxury franchises that were part of the earlier proposal.
Wards interviewed Karolis about that transaction and more Here is an edited version of the Q&A.
Wards: Presidio is in the news lately because of the Park Place-Asbury deal. Comparing the original deal vs. the final deal, how was the final deal different?
Karolis: The biggest driver was, they’re not buying the properties at closing. Rather, they’re leasing them from the owner with an option to buy in the future. The other fundamental difference in the deal was, there are two fewer dealerships, with seven franchises, being sold to Asbury. The core transaction is intact. The terms and the pricing are slightly different.
Wards: Still, the ultimate price was smaller. You can understand, even if this was the wrong impression, the numbers prompted some concern that maybe dealership values tanked because of coronavirus.
Karolis: I would not say values tanked initially because of coronavirus. What we saw initially was some hysteria in mid to late March and into April where things shut down or sort of stopped. The country was somewhat shut down. We didn’t really see values drop, and we’ve seen the trend towards putting everything on hold fully reverse itself.
Wards: Was the market frozen?
Karolis: We sold 10 dealerships during COVID. There are approximately 25 dealerships that are expected to close over the next few months. We see that continuing. We’re quite active. The M&A market is quite active, as active as we’ve seen it in some time. The quality and the desirable franchises, the desirable geographies, are faring very well. We have not seen valuation affected for good assets.
Wards: How about less-good assets?
Karolis: There’s always going to be a subset of distressed assets, or markets that are not as desirable. Hey, it’s supply and demand, and pricing. We’re seeing very strong buyer demand in the market.
Wards: What’s driving demand for dealerships?
Karolis: We know that’s being driven by a few factors. One is, there were a lot of unknowns in the beginning of COVID-19. But we’ve come out of it, and sales are doing pretty well, even some record sales at least in the short term.
Also driving up demand are low interest rates and high incentives. There’s also a shift to personal safety and mobility, as opposed to ride sharing. There’s a whole new subset of buyers that didn’t exist, a lot of folks who never wanted to buy a car, didn’t need a car. Millennials, who are known for not especially wanting to buy vehicles, are shunning mass transit and ride-share. That’s another driver for the dealer model: The personal vehicle is king.
Wards: How’s the market for the privately held dealership chains? Inevitably, we write a lot about the publicly traded groups, but I know groups like Berkshire Hathaway are huge.
Karolis: Generally, the industry seems to focus on the publics. They’re the biggest, mostly, and their information is more available. But the buy-sell market – say, something like 90% of it – is really driven by the privates. The publics make up maybe 10%, if you look at it in number of transactions. A good portion of the privates, the ones at the top of the list but also some below that, are quite active right now. They’re in buy mode, they’re looking to expand their portfolios with quality dealerships.
Wards: The public groups, at least, all seem to be concentrated in the “smile,” the part of the U.S. map that includes both coasts and the South. Aren’t there groups buying up dealerships in New England or the Midwest?
Karolis: There are groups, like the McLarty Automotive Group, their core holdings are in Arkansas, Mississippi, Missouri. Groups like that in regional markets are looking for deals in those areas. There are a lot of groups like that. Some are under the radar. Some are in the Midwest or the Northeast. Buyers in those geographies, that’s where they’re from and that’s what they know. They do well because there’s demand for vehicles, and sales and service, no matter where you are. And the franchise laws around the country protect dealers pretty well.
Wards: But the action is in the smile?
Karolis: But sure, all the buzz seems to be more in the smile. Generally, Texas and Florida are the top two states that come up. There are more folks that want to buy stores in markets like that. What does that mean? It means prices are going to be a little richer.
Wards: How about all the supposed “threats” to the franchised, new-car dealer network as we know it, like digitalization?
Karolis: That’s a key factor right now. Groups that have that in place, or that have the ability to adopt that technology – and it does take a willingness to invest in that – are probably going to fare better over time. But there’s always going to be a need for a dealership. A good portion of a dealership is taken up by service and by the need for storage. Dealers aren’t going to go away.
Wards: For a while, a lot of people said the real estate under dealerships was more valuable than the dealerships, which would all be turned into Starbucks.
Karolis: There are requirements for size, for the number of bays. I don’t see any short-term change in that. What will change is process, more than anything. Over time, if electrification truly gains steam and takes over, that may change the structure of the service department. But that’s yet to been seen, and still a good way away.