the blue sky report

THE
BLUE SKY REPORT
TM
A KERRIGAN QUARTERLY
2015 Full Year Report
March 2016
Contact Erin Kerrigan: 949-439-6768 | [email protected]
Contact Ryan Kerrigan: 949-728-8849 | [email protected]
19700 Fairchild, Suite 150 Irvine, CA 92612 | 949-202-2200 | www.kerriganadvisors.com
Contact Erin Kerrigan: 949-439-6768 | [email protected]
Contact Ryan Kerrigan: 949-728-8849 | [email protected]
19700 Fairchild, Suite 150 Irvine, CA 92612 | 949-202-2200 | www.kerriganadvisors.com
THE BLUE SKY REPORT™
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DEALERSHIP ACQUISITION ACTIVITY
2015 was a record year for dealership buy/sells. The first half of the year was marked by the Van Tuyl
transaction – the single largest acquisition in auto retail history. Berkshire Hathaway’s entrance into auto
retail paved the way for other non-traditional buyers to follow suit. As the year progressed, a number
of iconic multi-dealership groups came to market and were acquired by both established consolidators
and these new entrants. New dealership buyers, including family offices, private equity firms, and public
conglomerates, acquired 29% of the franchises sold in 2015, a stunning accomplishment (See Chart 1).
Kerrigan Advisors believes new entrants will increasingly shape dealership consolidation and meaningfully
impact the future of auto retail.
Chart 1
2015 Buyers by Type
Source: The Banks Report & Kerrigan Advisors Analysis
Private Dealership Groups
355 Franchises
64%
6 Public Dealership Groups
38 Franchises
7%
New Entrants
165 Franchises
29%
Five large new entrants represented
29% of the franchises acquired in
2015, four times the number acquired
by the industry’s six publicly traded
dealership groups. Kerrigan Advisors
expects new entrants to drive industry consolidation in 2016 and beyond.
The Five Most Active New Entrants of 2015
Berkshire Hathaway Automotive
A subsidiary of Berkshire Hathaway
McLarty Automotive
Backed by Soros Fund Management and the family offices of La France and J.B. Hunt
RFJ Auto Partners
Backed by The Jordan Company, a private equity firm
Fremont Private Holdings
The family office of the Bechtel Family
ZT Motor Holdings
A group of high net worth investors
Throughout the year, dealership valuations maintained historically high levels. This was in large part
due to attractive acquisition financing which helped support high prices, even in the face of potentially
peaking dealership profits (see Chart 2 on the following page). Private buyers offered the most aggressive
pricing, while public buyers remained disciplined with their offers, unwilling to complete transactions which
could be dilutive to earnings.
1
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Chart 2
Average Dealership Earnings
Source: NADA
$1,400,000
New Normal
or Peak?
$1,200,000
$1,166,675
$1,000,000
$800,000
2000-2007
Average Earnings $542,881
$600,000
$400,000
$279,685
$200,000
$0
2000
2001
2002
2003
2004
2005
2006
2007
2008
2009
2010
2011
2012
2013
2014
2015
Another 2015 buy/sell trend was the manufacturer’s use right of first refusal clauses (“ROFR”) in their
service and sales agreements. While ROFRs were commonplace in 2015, Kerrigan Advisors notes that an
estimated 29 multi-franchise transactions were completed without a ROFR being exercised. In Kerrigan
Advisors experience, manufacturers are less likely to exercise their ROFR in multi-dealership transactions
and more likely to exercise in a single dealership transaction. This is not surprising given the high stakes
associated with the sale of a large group to a single buyer. In that instance, a manufacturer could open
itself up to a seller lawsuit, something they would prefer to avoid.
“Some of these big deals come in as package deals. When it is one store and they are selling
them as a bundle, it is hard to exercise our right of refusal.”
Steve Cannon, Prior CEO of Mercedes-Benz USA, July 2015 Automotive News
In addition to the aforementioned trends, Kerrigan Advisors noted the increasing importance of real estate
in a transaction. In some cases, buyers based their pricing on a multiple of EBITDAR (earnings before
interest, taxes, depreciation, amortization and rent), offering a single price for an entire transaction
including real estate. This approach recognizes the importance of real estate to dealership operations.
As commercial real estate prices continue to rise and image requirements expand, Kerrigan Advisors
believes transaction pricing will be increasingly affected by real estate values.
2
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Going forward, Kerrigan Advisors expects the aforementioned drivers of 2015’s buy/sell market to continue
into 2016. In addition, Kerrigan Advisors sees four important market trends shaping 2016.
4 New entrants continue to seek large acquisitions
4 Return on investment drives valuations, particularly for larger transactions
4 Blue sky multiples are firmer, less dependent on profit potential
4 Publics’ capital allocation is driven by stock price
The Blue Sky Report™ is informed by Kerrigan Advisors experience representing our clients in
today’s active buy/sell market, as well as the research conducted by our firm. We hope you find
the information we present informative. We look forward to answering any questions you may have
regarding The Blue Sky Report™ or Kerrigan Advisors’ sell-side services.
Total Acquisition Activity
Transaction activity increased by 17% in 2015 according to The Banks Report, representing
a record year for auto retail buy/sells. There were 242 dealership buy/sell transactions in 2015,
compared to 206 in 2014.1
Chart 3
Total Number of Completed Dealership Transactions 2014 vs. 2015
Source: The Banks Report & Kerrigan Advisors Analysis
242
Transactions
206
Transactions
2015 was a record year.
Transaction activity
increased 17% as
compared to 2014.
FY 2014
1
FY 2015
Note: A transaction is defined as a sale between one buyer and one seller. By way of example, Berkshire Hathaway Automotive’s
acquisition of Van Tuyl is considered a single transaction, although it included 78 dealerships and 116 franchises.
3
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4
Among the franchises being acquired, import franchises saw their market share increase by nearly
10% at the expense of domestic franchises, which lost 10% market share as compared to 2014
(Chart 4). Kerrigan Advisors attributes this shift to an increase in the supply of top import sellers
(luxury and non-luxury). Though domestic franchises represent 67% of all US franchises, they
accounted for only 36% of the franchises sold in 2015. This discrepancy is a result of the large
number of domestic franchises, many of which are small or located in non-metro markets where
there are fewer buy/sells.
Chart 4
Buy/Sell Market Share in 2014 vs. 2015
Source: The Banks Report & Kerrigan Advisors Analysis
2014
2015
Import Non-Luxury
43%
Import Non-Luxury
38%
Domestic
35%
Import Luxury
17%
Domestic
45%
Import Luxury
22%
Import franchises added 10% market
share in the buy/sell market in 2015
as compared to 2014, while domestic
franchises lost buy/sell market share.
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This being said, as you can see from Chart 5, two of the three most actively traded franchises in 2015 were
Chevrolet and Ford. Price sensitive buyers appreciate the lower blue sky multiples associated with top
domestic franchises (4.0x-5.0x), relative to the top imports (5.0x-6.5x).
Chart 5
Franchise Buy/Sell Market Share 2015
Source: The Banks Report and Kerrigan Advisors Analysis
Lincoln
Infiniti 2%
BMW 2%
Audi
2%
Volvo
2%
Chevrolet
8%
2%
Ford
8%
Subaru
3%
Mazda
3%
Cadillac
3%
Toyota
8%
Mercedes
3%
kia
3%
CDJR
7%
GMC
4%
Buick
4%
Hyundai
4%
Nissan
7%
VW
5%
Honda
5%
“The domestics have been trading at a discount to other franchises in the market and those
are very attractive.”
Craig T. Monaghan, President and CEO Asbury Automotive Group (ABG) - Feb 2016
5
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6
Public Acquisition Activity
The public retailers’ acquisition spending decreased 42% in 2015 compared to 2014. In 2014, the
publics far surpassed their average annual pre-recession acquisition spending of $700M (2000-2007)
and reached their highest US acquisition spending in auto retail history - $1.4 billion. This was in large
part due to Lithia’s acquisition of DCH which accounted for 40% of 2014’s public acquisition
spending. In 2015, faced with stiffer competition from new entrants, the publics found it more difficult
to compete for larger group transactions. Of the estimated 558 franchises sold, the publics acquired
only 38, representing just 7% of the buy/sell market – one fifth the number acquired by new entrants.
Chart 6
Public Auto Dealership Group US Acquisition Spending in Millions
Source: SEC Filings for AutoNation, Penske, Group 1, Asbury, Sonic and Lithia
Public companies spent an
estimated $832 million on US
auto dealership acquisitions in
2015, a 42% decrease over 2014.
$1,046
$803
$1,449
$832
$654
$392
$504
$283
$502
$659
$489
$211
$198
$14
2004
2005
2006
2007
2008
2009
2010
2011
2012
2013
Note: This spending EXCLUDES Penske’s commercial truck acquisitions. $ in Millions
2014
2015
9
9
Mos:14 Mos:15
Interestingly, public acquisition spending was entirely US focused in 2015, a notable shift from a few years
prior when nearly 30% of acquisition spending was international (see Chart 7).
THE BLUE SKY REPORT™
Chart 7
Public US vs. International Acquisition Spending
Source: SEC Filings for AutoNation, Penske, Group 1, Asbury, Sonic, and Lithia
25%
100%
75%
2013
2015
US
International
AutoNation was the most acquisitive of the publics in 2015, acquiring twenty-two dealerships,
representing $1 billion in revenue. 2016 will also be a strong year for the company with the
expected completion of the Allen Samuels Auto Group acquisition, representing $950M in revenue
and 12 dealerships. This level of activity represents a sizable increase over previous years;
however, it may not portend the future.
AutoNation’s stock price has declined 22 percent since its peak on 07/17/15 and its enterprise
value to EBITDA multiple is currently 8.3x, making fewer transactions accretive to earnings
(this topic will be further discussed in the trends section on page 9).
Chart 8
Transactions Completed by the Publics in 2015
Source: Company Filings
22
6
Autonation
Lithia
4
Penske
3
Group 1
*Note: Sonic did not make any acquisitions in 2015
2
Asbury
|
7
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Private Acquisition Activity
The private sector, including new market entrants, dominated the buy/sell market in 2015. Kerrigan
Advisors expects private dealership groups to drive industry consolidation in 2016, in part because
they are not usually subject to framework agreements which limit the publics’ ability to make large
multi-dealership acquisitions.
Chart 9
Number of Franchises Acquired By Type of Buyer 2014 vs. 2015
Source: The Banks Report and Kerrigan Advisors research
Note: If a transaction includes multiple franchises, each franchise is counted in this analysis.
165
38
65
355
303
2014
New Entrants
The publics saw their share of
franchises acquired decline by 67% in
2015. While AutoNation was very
active, the lack of a Lithia/DCH size
transaction reduced their overall
share of the buy/sell market.
2015
Public
Private
Private dealers also have access to acquisition financing at rates that rival the publics and are not limited
by the short-term performance expectations of Wall Street. Private buyers can increase their leverage and
invest with a long-term perspective which often allows them to price acquisitions higher than the publics.
8
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9
2016 BUY/SELL TRENDS
In 2015, dealership valuations rose to historically high levels, new entrants made sizable acquisitions,
manufacturers approved numerous multi-dealership transactions, and real estate prices returned to
pre-recession levels. In summary, it was a year that is hard to beat. While the 2016 buy/sell market is
expected to be as active as 2015, Kerrigan Advisors anticipates the proportion of sellers completing a
successful sale could decline as industry growth plateaus and dealership earnings come under pressure.
Chart 10
AutoNation Stock Price July 2015 to February 2016
Source: Yahoo Finance
75.0
70.0
$66.19 $66.19
65.0
2.6
60.0
55.0
62.6
“Conditions in the U.S. are as good as
they get. I’ve never seen a period where
in the on
U.S.the
are as
good as they
I can’t"Conditions
see a cloud
horizon.
“ get. I've never seen a
period where I can't see a cloud on the horizon. "
Mike Jackson,
CEO
ofofAutoNation
“You’ll hear a lot of happy
- Mike Jackson,
CEO
AutoNation (Jul 2015)
(Jul 22, 2015)
talk from everybody else in
the industry, [But] I’m
$66.19
saying we’re in a new
chapter here.”
Mike Jackson, CEO of
AutoNation (Jan 6, 2016)
"You'll hear a lot of happy
talk from everybody else in
the industry, [But] I'm
saying we're in a new
chapter here."
- Mike Jackson, CEO of
AutoNation (Jan 2016)
50.0
45.0
$41.53
$41.53 $41.53
15 May-15
y-15
Jun-15 Jun-15
Jul-15
40.0
Mar-15
Apr-15
May-15
Jun-15
Jul-15Dec-15
Aug-15
Sep-15
Oct-15
Jul-15
Aug-15
Sep-15
Oct-15
Nov-15
Jan-16
Feb-16
Aug-15
Sep-15
Oct-15
Nov-15
Dec-15
Jan-16
Feb-16
Nov-15
Dec-15
Jan-16
Feb-16
Much like the change in tone from AutoNation’s CEO, Mike Jackson, seen above, Kerrigan Advisors sees
a buy/sell market caught between competing forces, weighing the momentum of recent boom years
against clear signs of change. As such, the outlook begins to look hazier. The following forces could
push prices and transaction activity up or down, depending on their relative influence.
4 New entrants continue to seek large acquisitions
4 Return on investment drives valuations, particularly for larger transactions
4 Blue sky multiples firmer, less dependent on profit potential
4 Publics’ capital allocation is driven by stock price
New Entrants Continue to Seek Large Acquisitions
2015 was a remarkable year for new entrants to auto retail. The five most active new buyers acquired
an incredible 165 franchises, three times more than the six public companies. These new players
have the deep pockets and long term investment horizon to continue to make major acquisitions in
2016 and beyond.
“I’d be very surprised if five years from now we aren’t a whole lot bigger.”
Warren Buffet on CNBC speaking about Berkshire Hathaway Automotive (Mar 2015)
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10
In addition to those who successfully closed on transactions in 2015, Kerrigan Advisors believes several new
players will come on the scene in 2016. Specifically, our firm is aware of a number of experienced dealers
who have partnered with private capital sources to make sizable acquisitions. This fresh well of capital will
increase demand for platform acquisitions and could serve as a significant counter weight to the challenges
associated with slower industry growth.
Return on Investment (“ROI”) Drives Valuation
Today’s buyers are determining their transaction pricing based on an expected ROI. In most cases, this
means considering the full enterprise value of an acquisition, including blue sky, working capital, fixed
assets and real estate to determine the free cash flow as a percentage of the total investment. These
buyers are also factoring in their cost of capital and are highly sensitive to any changes in borrowing costs
or terms.
As can be seen in Chart 11, buyers who are focused on ROI will be more challenged in their efforts to
acquire luxury franchises, many of which have been trading at very high multiples and provide a lower
return relative to price. The new entrants will not make investments that do not make economic sense in
their financial models. Consistent with this point, the new entrants have acquired very few luxury
franchises to date.
This situation poses an interesting challenge for sellers of large luxury platforms. Only very deep pocketed
buyers can afford these acquisitions, and yet, the luxury pricing is a mismatch with many buyers return on
investment requirements. That said, existing private groups are still willing and able to pay steep
premiums for luxury dealerships that are both prestigious and considered easier to operate.
Chart 11
Expected Return on Franchise Investment
18.2%
Source: Kerrigan Advisors Analysis
13.3%
10.0%
Top Luxury Franchise ROI
Top Non-Luxury
Import Franchise ROI
Domestic Franchise ROI
Blue Sky Top Luxury Multiples = 9.0x (Based on High Blue Sky Multiple of Lexus, BMW, and Mercedes) Top Import
Multiples = 6.5x (Based on High Blue Sky Multiple of Toyota, and Honda) Domestic Multiple = 4.5x (Based on Average
Blue Sky Multiple of Ford and Chevy)
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Blue Sky Values are Firmer, Less Dependent on Profit Potential
Between 2009 and 2013, auto retail sales grew at an average rate of 10.6%. This rising tide had the
effect of lifting dealerships into profitable growth mode. However, as sales growth slows to a standstill
(see Chart 12), earnings are expected to decline as margins come under pressure. In this environment,
blue sky values will vary more dramatically from dealership to dealership.
Chart 12
Total U.S. Light Vehicle Sales in Millions and YoY Growth
Source: Kerrigan Advisors Analysis and Automotive News
20.0
16%
18.0
16.0
14.0
13%
11%
12.0
10.0
11.6
10%
14.5
12.8
15.6
16.5
17.5
17.8
17.8
12%
10%
8%
6%
8.0
8%
6%
6%
6.0
4.0
4%
2%
2.0
0.0
0%
2010
2011
2012
2013
14%
2014
TOTAL U.S. LIGHT VEHICLE
2015
2016E
2017E
2%
0%
YoY Growth
Buyers will also be less willing to price transactions based on earnings upside. In a slow/no growth
market, performance improvements are much harder to achieve and buyers will be less willing to pay
sellers for underperformance. Increasingly, transaction pricing will be based solely on current earnings
with less attention paid to previous success or future potential.
“Go back to 2000, the last time we had records, if you look at the next five years, industry
sales were very good. However, the quality of the earnings [at that time] deteriorated
dramatically as the industry really couldn’t manage flat sales.”
Mike Jackson, CEO AutoNation (AN) - Jan. 28, 2016
11
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Publics’ Capital Allocation is Driven by Stock Price
The publics’ stock prices plummeted an incredible 29% between January 1, 2016 and February 26, 2016
(see Chart 13 on the following page). This decline resulted in a significant decline in their valuation metrics
(see Chart 14 on the following page). Generally, the publics make acquisitions which are accretive to
earnings. In order for an acquisition to be accretive to earnings, the buyer’s valuation multiples must by
higher than the seller’s valuation multiples.
The collective multiples for all of the publics were at all-time highs from 2014 through most of 2015. Given
this, it is not surprising that public acquisition activity reached historic levels last year - most deals were
very accretive to earnings. However, with their dramatic decline in market capitalization, the publics will
find it more difficult to make accretive acquisitions.
Until stock prices rise, Kerrigan Advisors believes public capital will increasingly be allocated toward stock
buybacks, as noted in the publics’ 4th quarter earnings calls. From the public CEOs’ perspective, an
investment in their own stores in the form of a stock buy/back is much less risky and a lot less work than
acquiring and integrating a new dealership or dealership group. If both opportunities are priced the same,
the stock buyback decision is the obvious choice.
Craig T. Monaghan
President, CEO & Director
Asbury Automotive Group (ABG) - Feb. 4, 2016
Roger Penske
CEO
Penske Automotive Group’s (PAG) – Feb. 11, 2016
“With our stock trading where it is today, buying
our stores via share repurchase becomes a pretty
attractive option.”
“Based on the current stock price, I think we’ve
got to look at buyback versus acquisition, what
gives the shareholder the best return.”
John Rickel
CFO
Group 1 Automotive (GPI) - Feb 11, 2016
Heath R. Byrd
CFO & Executive Vice President
Sonic Automotive (SAH) – Feb 23, 2016
“The hurdle to have an acquisition is steeper than
it would have been. Our shares are, obviously, a
very attractive alternative for capital allocation at
these prices.”
“We were trading at 3.2 times our store level EBIT.
And so it becomes an obvious decision on what
you do with your money as it relates to spending
8 to 10 times EBIT to acquire.”
Mike Jackson
CEO
AutoNation (AN) - Jan. 28, 2016
“There is a competition between the return of
buying our own stock and what we can buy in
the marketplace.”
12
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Chart 13
S&P 500 vs. Auto Dealership Stock Composite Indices
Source: Kerrigan Advisors Analysis and Yahoo Finance
120
110
100
(9.4%)
90
80
(29.1%)
70
60
Jan 15
Apr 15
Jul 15
SPX
Oct 15
Jan 16
Auto Dealership Composite
Chart 14
Public Valuation Metrics
Source: Kerrigan Advisors Analysis and Yahoo Finance
TEV = Total Enterprise Value
Note: Kerrigan Advisors believes the public’s valuation metrics are an important indicator for private
dealership valuation trends. The six public dealership groups are “marked to market” every business day
by thousands of investors who buy and sell their stock. The efficiency of the public stock exchanges,
relative to the private dealership buy/sell market, informs franchise valuation trends and should be closely
watched.
13
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14
KERRIGAN ADVISORS BLUE SKY CHARTS
Kerrigan Advisors Blue Sky Charts lay out the high, average and low blue sky multiples for each franchise
in the luxury and non-luxury segments. Most dealerships are valued based upon their assets plus blue
sky. Kerrigan Advisors’ blue sky multiples can be applied to trailing twelve month adjusted pre-tax
dealership earnings to estimate blue sky value.
The Kerrigan Advisors’ blue sky multiples are based on our view of franchise values in the current
buy/sell market. These multiples should be considered guide posts to estimate a dealership’s blue sky
value; however, each dealership has its own unique valuation drivers and significant analysis should be
done to determine the market clearing price for blue sky.
The high, average and low multiples reflect the variability in dealership values. In our experience, there are
four key factors that drive where a franchise will sell within the range: (i) earnings growth expectations;
(ii) buyer demand; (iii) real estate, and (iv) market preference. The combination of these four factors plays
a major role in the blue sky multiple a buyer is ultimately willing to pay.
Factor One: Earnings Growth Expectations
Higher Growth = Higher Multiple: Underperforming dealerships provide an opportunity for higher earnings
growth. A dealership that is underperforming, meaning its profitability and/or sales are below market
expectations, often commands a higher blue sky multiple because the buyer believes he/she can grow
profits at an above-average rate by reducing expenses, increasing gross profit or growing sales. Also,
dealerships in high growth markets have higher earnings growth expectations. By way of example, Texas,
Arizona and Florida are high growth markets where dealerships often command premium multiples.
Lower Growth = Lower Multiple: Over-performing dealerships can experience below average earnings
growth post-sale. Ironically, a dealership that is over-performing, meaning its profitability and/or sales are
above market expectations, often commands a lower blue sky multiple. Also, dealerships in slow growth
markets, such as many smaller Midwestern markets, can expect slower earnings growth.
Factor Two: Buyer Demand
Higher Demand = Higher Multiple: There are significantly more buyers seeking acquisitions in big cities than
there are sellers willing to part with their highly valuable, metro stores. High buyer demand, with limited
seller supply, drives up price (Economics 101).
Lower Demand = Lower Multiples: Less demand means less competition and lower blue sky multiples. As
an example, there are fewer buyers seeking dealerships in smaller/rural markets, resulting in lower multiples.
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15
Factor Three: Real Estate
Image Compliant Facilities & Low Rent = Higher Multiple: Image compliant dealerships with low rent
command higher multiples. These dealerships are highly attractive to buyers because they require no
additional investment and they have an attractive rent factor, thus low fixed expenses and less risk.
Note: In 2015, the average dealership according to NADA had a rent factor of 7.4% of gross profit.
In general, if a dealership is image compliant and its rent to gross profit is below 7.5%, then it is considered
to have low rent. Many buyers consider a rent to gross profit margin above 10% high.
Real Estate Investment Required and/or High Rent = Lower Multiple: Dealerships that require major real
estate investments or have high rent command lower multiples. Most buyers are not looking for real estate
development projects. When a dealership requires a significant real estate investment, both known and
unknown costs are created. These costs result in increased future rent, which could reduce future earnings.
As such, buyers often price non-image compliant franchises or franchises with high rent at lower multiples
to take into account the risks to earnings.
Factor Four: Market Preference
Highly Suitable Franchise for a Particular Market = Higher Multiple: Franchises that are highly suitable for
a particular market receive higher multiples. For example, a domestic franchise located in a truck market,
such as Colorado, is more valuable than the average domestic franchise in the U.S., and thus will likely
command a higher multiple. This is due to the fact that unit sales volume and dealership earnings in those
markets are expected to be far above the average domestic franchise.
Unsuitable Franchise for a Particular Market = Lower Multiple: Franchises that are unsuitable for a
particular market receive lower multiples. For example, a luxury franchise in a small city with fewer
high-income wage earners will be much less valuable than the average luxury franchise located in
a major metro.
In each case, these factors coalesce to push dealership multiples up or down. Sometimes they can
counter-balance one another.
THE BLUE SKY REPORT™
Kerrigan Advisors shifted its blue sky multiples throughout 2015, as can be seen in Charts 15 and 16.
Chart 15
Kerrigan 2015 Blue Sky Multiples – Non-Luxury Average
Source: Kerrigan Advisors Analysis
Non Luxury
4.06x
3.96x
Q4 2014
4.00x
4.00x
Q1 2015
Q2 2015
Q3 2015
4.10x
Q4 2015
Chart 16
Kerrigan 2015 Blue Sky Multiples – Luxury Average
Source: Kerrigan Advisors Analysis
Luxury
5.38x
5.38x
5.38x
Q4 2014
Q1 2015
Q2 2015
5.68x
5.68x
Q3 2015
Q4 2015
|
16
THE BLUE SKY REPORT™
For the first quarter of 2016, Kerrigan Advisors’ blue sky multiples have minimal changes. Our view is
that multiples are at peak levels and are unlikely to rise significantly above current levels. That said,
certain franchises do warrant adjustments or initiation of coverage.
One of those franchises is Subaru. Kerrigan Advisors has increased Subaru’s multiple on the high-end
from 5.5 to 6 and on the low-end from 4 to 4.5. This shift is a reflection of the brands continued stellar
performance (NOTE: The multiple increased in the first quarter of 2015 as well). Subaru once again lead
the non-luxury segment in sales and market share growth and increased sales per franchise by over 200
units in just two years, leading the segment. The brand is in very high demand by buyers. In certain
markets, such as Seattle, Subaru is the top selling import franchise, surpassing both Toyota and Honda.
After many requests, Kerrigan Advisors is also initiating coverage of Buick/GMC. Buick/GMC’s blue
sky multiple is highly dependent upon the market in which the franchise is located and the proximity of
competing franchises. Buick/GMC’s value is also impacted by the franchises with which it is dualed.
For instance, a Chevrolet/Buick/GMC dealership will command a higher multiple than a stand-alone
Buick franchise. With over 2,000 Buick and over 1,700 GMC franchises, sales per franchise is low and
profitability is, thus, variable. That being said, General Motors, under the stewardship of Mary Barra, is
well positioned for growth and both product lines are considered strong. Buick/GMC’s multiple is being
initiated at a 3.0x-4.0x.
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17
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Chart 17
Kerrigan Advisors Blue Sky Chart and Analysis: Non-Luxury
Source: Kerrigan Advisors Analysis and Automotive News
Kerrigan Advisors
Blue Sky Multiples
7
6.5
6.5
5.0
5.0
6
5
4
6.0
4.5
5.0
5.0
5.0
4.0
4.0
4.0
4.0
4.0
4.0
4.0
3.0
3.0
3.0
3.0
Buick/GMC
4.0
3.5
3.0
Nissan
4.0
3.5
3.0
Hyundai
4.0
3.5
3.0
Kia
4.0
3.5
3.0
3.0
3
2
1
High
Average
Low
Toyota
6.5
5.8
5.0
Honda
6.5
5.8
5.0
Subaru
6.0
5.3
4.5
Chevy
5.0
4.5
4.0
Ford
5.0
4.5
4.0
CJDR
5.0
4.5
4.0
3.0
2.0
2.0
VW
3.0
2.5
2.0
Mazda
3.0
2.5
2.0
Kerrigan Advisors Blue Sky Chart and Analysis: Non-Luxury
Franchise
Buyer Demand
Market Share Change FY
2015 vs FY 2014
Change in Sales FY
2015 vs FY 2014
Sales Per
Franchise
Average Dealership
Profitability
Moody's Credit Rating
High
-1%
+5%
1,698
Consistently High
Aa3
High
-3%
+3%
1,350
Consistently High
A1
High
+7%
+13%
932
Variable
NA
Increasing
-1%
+5%
703
Variable
Ba1
Increasing
-0%
+5%
771
Variable
Baa3
Average
+2%
+7%
932
Variable
B1
Average
+1%
+7%
401
Variable
Ba1
Average
+1%
+6%
1,262
Variable
A3
Average
-1%
+5%
919
Variable
Baa1
Average
+2%
+8%
813
Variable
Baa1
Low
-10%
-5%
537
Consistently Low
A2
Low
-1%
+4%
499
Consistently Low
NA
18
THE BLUE SKY REPORT™
|
19
Chart 18
Kerrigan Advisors Blue Sky Chart and Analysis: Luxury
Source: Kerrigan Advisors Analysis and Automotive News
Kerrigan Advisors
Blue Sky Multiples
9.0
7.0
9.0
7.0
9.0
8.0
8.0
6.0
6.0
7.5
7.0
3.5
3.5
3.5
3.5
3.0
3.0
3.0
3.0
Acura
Infiniti
Cadillac
Volvo
3.5
3.25
3.0
3.5
3.25
3.0
3.5
3.25
3.0
3.5
3.3
3.0
4.0
High
Average
Low
Lexus
BMW
Mercedes
Audi
Porsche
9.0
8.00
7.0
9.0
8.00
7.0
9.0
8.00
7.0
8.0
7.00
6.0
8.0
7.00
6.0
Land Rover Jaguar*
7.5
5.75
4.0
Kerrigan Advisors Blue Sky Chart and Analysis: Luxury
Franchise
Buyer Demand
Market Share Change Change in Sales FY
FY 2015 vs FY 2014
2015 vs FY 2014
Sales Per
Franchise
Average
Dealership
Profitability
Moody's Credit
Rating
High
5%
+11%
1,466
Consistently High
Aa3
High
-4%
+2%
1,021
Consistently High
A2
High
-1%
+5%
1,019
Consistently High
A3
High
+5%
+11%
714
Consistently High
A2
High
+4%
+10%
274
Consistently High
A2
High (LR)
+30% LR
-13% Jag
+37% LR
-8% Jag
423 LR
88 Jag
Consistently High
(LR)
Ba2
Low
-0%
+6%
649
Consistently Low
A1
Low
+8%
+14%
645
Consistently Low
A3
Low
-3%
+3%
189
Consistently Low
Ba1
Low
+18%
+24%
237
Consistently Low
Baa2
In closing, we hope you find this Kerrigan Quarterly informative. If you are a buyer in today’s market,
Kerrigan Advisors welcomes the opportunity to learn of your acquisition criteria and include you in our
proprietary Buyer Database. If you are seller, we look forward to having a confidential conversation with
you about your dealership’s value and potentially serving you as our client.
At Kerrigan Advisors, we run a professional, discrete and competitive dealership sale process to determine
the highest market-clearing price for our clients’ franchises. We manage our client’s sale from beginning to
success. In our view, dealerships and dealership groups are far too valuable to be sold any other way.
We hope to see you at one of our upcoming speaking events or at NADA in Las Vegas. Please contact
Marie Brashears, Kerrigan Advisors’ Executive Coordinator, to schedule a confidential in-person meeting
or telephone conversation. Marie can be reached at (949) 202-2200 or [email protected]
Ke
Kerrigan Advisors’ recently completed transactions representing
$400 million in client proceeds in its inaugural year of business.
“Kerrigan Advisors was instrumental in positioning our dealership group for
maximum return on our investment. We would not have received the offer
that we did without their valuable insight into the market, and the correct
positioning of our dealership group. Having them as my partner gave me the
confidence to move forward with the sale.”
Patti Swope, former owner of Sam Swope Auto Group
“Working with Kerrigan Advisors got us top dollar for our dealerships and
property. Their expertise in handling the negotiations of the transaction was
critical to us maximizing our deal.”
Bob Lanphere, former owner of Renton Honda and Kia
“I heartily recommend Kerrigan Advisors if you are considering a sale of your
dealership, particularly if you expect and appreciate first rate professional
advice and excellent value, with a high degree of confidentiality.”
David Morris, former owner of Mercedes Benz of Edmonton West
“Kerrigan Advisors did an exceptional job selling our dealership. Erin
Kerrigan led a highly effective and confidential sale process that resulted in
an outstanding outcome. I highly recommend her for her integrity, client
commitment and professionalism. In my opinion, Kerrigan Advisors is the
best representative a dealer could have!”
Johnny Harrison, former owner of Lexus of Glendale
Dealerships are Far Too Valueable to be Sold Any Other Way
THE BLUE SKY REPORT™
KERRIGAN ADVISORS UPCOMING
SPEAKING EVENTS
JD Power Summit before NADA
Wynn Las Vegas
March 31, 2016
Texas Auto Dealers Association 100th Anniversary Annual Conference
JW Marriott, Austin TX
April 17-18, 2016
|
21
We Serve Sellers. We Know Buyers.
Kerrigan Advisors is focused on serving dealership sellers. We customize
our sale process to maximize our client’s transaction proceeds. The firm’s
leadership has advised on over $2 billion worth of transactions in auto
retail, private equity and investment banking. We leverage our proprietary
Buyer Database and extensive industry relationships to identify the right
buyer for our client’s business. Our sale process is highly professional,
actively managed, competitive, and – most important – discrete.
Kerrigan Advisors
19700 Fairchild, Suite 150
Irvine, CA 92612
949-202-2200
www.kerriganadvisors.com
Erin Kerrigan is Managing Director of Kerrigan Advisors, which she founded in 2014. Prior to
founding Kerrigan Advisors, Ms. Kerrigan headed Presidio Automotive. During her time at Presidio,
the firm represented dealer clients in numerous multi-million dollar transactions. Prior to Presidio,
she was a Senior Vice President at AutoStar, a subsidiary of iStar Financial (NYSE:SFI), where she
led transaction origination. Early in her career, she was dealer operator of her family’s dealership,
which she sold in 2006. Ms. Kerrigan is a recognized industry expert on dealership valuation, real
estate and buy/sells, and is a frequent speaker at leading auto retail events and conferences,
including NADA (#1 speaker in 2012), AICPA, NADC and Driving Sales’ President’s Club. She has
also led webinars for NADA and Automotive News on the topic of buy/sells and she writes a monthly
column and blog for Dealer Magazine. Ms. Kerrigan earned her undergraduate degree from
Northwestern University and her Masters in Business Administration from The UCLA Anderson
School of Management.
Contact Erin Kerrigan: 949-439-6768 / [email protected]
Exceptional Sell-Side Representation
for Auto Dealers
Ryan Kerrigan is Managing Director of Kerrigan Advisors. Mr. Kerrigan oversees strategy, finance
and modeling for Kerrigan Advisors and lead the firm’s private equity and family office advisory
practice. He has extensive experience in private equity investing, auto retail, management consulting
and executive management. In addition to his auto sector experience, Mr. Kerrigan has served as
CEO of several companies during his career, including Elevate Property Services and Alta
Environmental, companies he currently owns. During his career, he also served as Managing
Director at Serent Capital, a $250mm private equity fund investing in middle market companies and
as General Manager of his family’s auto dealership. Early in his career, Mr. Kerrigan spent four
years as a management consultant at McKinsey & Company, where he advised Fortune 500
companies on growth strategies, organizational issues, pricing and business valuation. Ryan has an
MBA from Stanford University’s Graduate School of Business and an MSFS from Georgetown
University’s School of Foreign Service. He graduated summa cum laude from the University of
Notre Dame with a BBA in Finance.
Contact Ryan Kerrigan: 949-728-8849 / [email protected]
.