Domestic Franchises Attracting Big Dealers

Auto industry giants like Roger Penske are taking a look at the domestics these days; Penske usually invests in luxury and import dealerships, but lately he’s taken a liking to the domestics available now.  The Penske Automotive Group CEO told analysts last week, “We want to invest in brands that have legs.” He said the big three “have culled down the number of dealerships” which has created an environment in which “there might be good opportunities in markets where we have strength.”

Many of the larger groups like Penske’s have begun competing for buying opportunities. In Salt Lake City, Utah, the Larry Miller Automotive Group recently bought two Chrysler-Dodge-Jeep dealerships and one Chevrolet dealership. The Miller Group, which is listed as the tenth largest group based on its existing Toyota-Lexus-Scion stores, has announced that it will purchase three more stores in Utah that sell Chevrolet, Chrysler-Dodge-Jeep and Ford-Lincoln-Mercury.

Miller Group president Tony Schnurr said, “Right now the Detroit 3 are some of the most exciting franchises out there. There’s a tremendous growth opportunity in markets that support pickup trucks and other trucks.”

Import deals are no longer standard fare for some of the larger private and public dealership groups. San Francisco-based dealership broker Phil Vogel said of the domestics, “Those are the ones that are selling right now. Nobody has been turning import deals.”

Brokers are saying that the domestic franchises are a better bargain than the imports, and they yield a faster and easier return on investment. Some other historically import-buying groups that are looking for domestic deals include Asbury Automotive Group, Group 1 Automotive and AutoNation Inc. All three are looking at Ford dealerships for purchase, and two of them are also considering Chevy franchises.

Another big group that is taking a look at domestics is the David Wilson Group of Orange, California. Wilson is the twelfth largest dealership in the U.S., consisting mainly of Toyota, Lexus and Honda stores. It currently has one Ford dealership. CEO David Wilson said, “I like my Ford store and would buy another except that Ford is still overdealered in my market area. I would also like to add a Chevrolet store, [but] I am concerned that Chrysler may not make it.”

The developing trend toward buying domestic franchises is a combination of effects from the consolidation of the domestic market and the recession. Remaining stores can be made more attractive by the smaller dealer networks, which can increase throughput. The market-wide downturn of last year has forced even the larger groups to seek a greater balance of brands in their portfolios.

Dealership brokers are stressing the fact that the stores that are up for acquisition are profitable and healthy and will not be going for bargain-basement prices. Buyers are focusing on the potential savings they still may bring. Vogel said that the top import franchises bring three to four times net pretax earnings. The best can go for an earnings multiple of five. The top domestic franchises fetch two to three times the net pretax earnings, he says.

“There are some good opportunities,” says Vogel. “There are guys bullish on it. You can get economies of scale in certain markets where you already have a presence.”

The most attractive stores are the ones that will not require major remodeling or relocation. The best prospects are the stores that were recently renovated to factory specs, says Tony Schnurr. He says his goal is to pay for intangibles, or “the blue sky” assets, in three to five years.

Schnurr said, “We’re trying to be very smart about growth. But as we see certain opportunities in our markets, or markets we targeted, we try to go forward with those opportunities.”

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