Many dealer groups are betting that automotive retail sales will recover at a quicker pace than the rest of the economy. There are valid reasons to believe this.
However, there are two sides to every coin, and in the game of automotive retail acquisitions, one side can lose millions and the financial gains can be relatively low, given the level of risk.
Recent estimates for this year's total U.S. automotive retail sales suggest that about 11.5 million units will be sold. If this estimate holds true, we will see an increase of approximately one million units from last year, even though there are approximately 1,900 fewer dealers to share those incremental sales.
In 2009, there were approximately 20,500 dealerships which divided 10.5 million unit sales, giving them an average of approximately 513 annual sales units per location.
In 2010, there will be an estimated 18,600 dealerships that will divide 11.5 million unit sales for an average of about 618 annual sales units per location. This is a 20% increase from the previous year.
While the overall pie has gotten smaller, everybody's piece is slightly larger.
Many dealers and financial institutions took a wait-and-see approach to 2009 operations.
In 2010, with a rebounding economy, banks on more solid footing, and no government supported life-preserver like the Cash for Clunkers program, the realities of irrational purchase and construction exuberance (evident from 2006 to 2008) will likely catch up with some dealers, forcing many to consolidate or close.
This prediction does not even include the fact that several manufacturers seem to be following an eerily similar pattern to Isuzu (i.e. Mitsubishi and Suzuki) and could leave the U.S. market.
If these brands were to exit, it would eliminate over 400 stand-alone dealerships and nearly 1,000 franchises.
However, there is one potential wild-card option for both Mitsubishi and Suzuki that was not available to Isuzu. That is the appeal of their U.S. dealer networks to a Chinese auto maker planning to enter the American market.
The only realistic option to revive the Mitsubishi and Suzuki brands is an alliance with a Chinese manufacturer looking to gain an immediate foothold in this market.
Look at recent Chinese expansion in manufacturing and distribution in any industry. They do no approach growth organically.
They look to imitate, replicate and assimilate as much as possible. They do not believe in reinventing the wheel., but in making that wheel faster and cheaper.
Both Mitsubishi and Suzuki are ripe for picking and are positioned ideally for a Chinese alliance. In the end, this may be the only long term hope for the survival of the brands.
Many dealers in acquisition mode believe the time to buy is now, and that dealership prices will never be this low again. They believe that the value of stores will quickly rise to pre-2008 numbers.
For those dealers, it may be wise to take a deep breath and reconsider. While we are seeing a renewed vigor in the dealership merger and acquisitions environment with the economy rebounding, this is by no means cause to abandon rational investing judgment.
Unlike pre-2008 acquisitions, in which nearly every deal hinged on the Blue-Sky multiple and real-estate values were taken at appraised values, today the Blue Sky multiple has taken a back seat to dealership real-estate values.
Of the dozen deals we have worked on this year, the real-estate value was forefront in how we ultimately negotiated the value of Blue Sky.
With vacant dealership properties scattered throughout most cities and lenders hesitant to finance transactions, the dealership acquisition market will likely be primarily dominated by large groups over the next few years.
Phil Villegas is a principal at Dealer Transactional Services, LLC. (an affiliate of Morrison, Brown, Argiz & Farra, LLP) in Miami, FL. He is at [email protected] and 305-318-8515.
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