Auto dealer M&A update - Fourth quarter 2015

Market overview

The US auto dealer M&A market has ramped up significantly over the past two years, as 2015 dealer acquisitions (470 according to The Banks Report, which tracks car retailing M&A) increased 40 percent over 2014, which followed a 60 percent increase in 2014 over 2013. It should be noted, however, that of the 130 dealers sold in the first quarter of 2015, 81 were from the Berkshire Hathaway acquisition of Van Tuyl Group. The US auto retail market has consolidated from approximately 22,000 car dealerships in 2005 to 18,000 in 2015. We expect industry consolidation to continue, driven in large part due to robust new car demand and record sales, strong dealer profits, and an aging dealer owner population. Auto makers sold 17.5 million cars and light trucks during 2015, a 5.7 percent increase over 2014, due primarily to lower gasoline prices, rising consumer confidence, and low interest rates/greater access to credit.

The US auto dealer market is considered highly fragmented and geographically dispersed. As an industry that benefits from consolidation synergies including centralized selling and general and administrative functions, large national and super regional strategic buyers, private equity and family office buyers have been active in the market. Approximately 10 percent of the acquisitions during 2015 were generated by large publicly-traded dealer groups such as AutoNation, Inc., which bought more than 30 dealers in 2015 and is expected to generate $1.7 billion in revenue. Larger dealer groups are expected to remain acquisitive and leverage their scale, however there is a plethora of smaller dealer acquisition targets.

Publicly traded auto dealers are currently valued at a moderate premium over historical averages at 10.3x EBITDA. Average EBITDA purchase multiples have ranged from 8.0x to 8.5x and average sales multiples have ranged from 0.3x to 0.5x during recent years. Dealership specific M&A drivers include profit performance driven by strong new and used car sales and service and parts revenue, internet sales channel growth, and generational transitions. Dealer sale volume is forecast to increase again during 2016 amongst aging dealership owners whose businesses weathered the economic crisis and have seen sales fully recover.

Market value data is provided by the following six publicly traded auto dealers in the US, which account for approximately 9 percent of industry revenue. The identified comparable public companies are trading in a fairly narrow range; EV/EBITDA ranging from 8.6x to 11.5x, with a mean of 10.3x.

Comparable public company valuation summary

Source: Capital IQ (Feb. 15, 2016)

The mean EBITDA multiple of 10.3x represents a significant decrease compared to 2015’s third quarter 12.4x multiple, which is partially explained by the recent equity market pullback and relative underperformance illustrated below. The US stock market has pulled back considerably in recent weeks, with the S&P 500 down 7.4 percent over the past three months (as of Jan. 22, 2016). The six comparable public companies have significantly underperformed the broad market over the same time period.

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