Drive by an auto dealership and chances are the lot looks mostly empty. Low auto inventory exacerbated by the pandemic, combined with high consumer demand, has led to record profits for auto dealers nationwide. That, in turn, has led to high M&A volume with strong activity expected in the coming years.
In 2021, dealership M&A hit a record USD 6.23bn across 73 deals, according to Dealogic. Already this year, there have been 42 deals totaling USD 2.42bn.
Dave Cantin Group (DCG) Acquisitions, an automotive dealership M&A firm, expects to advise on 50% more transactions in 2022 than it did during its own record-breaking 2021, according to Brian Brown, its president. With two-thirds of 2022 gone, it is already up 23% on the whole of last year.
Buyers – many of them large publicly listed dealerships – are looking to improve operational efficiencies, which already happened significantly earlier in the pandemic. Many regional dealership groups also have a “healthy appetite” to grow in additional geographic territories, says Nancy Rolland, a managing partner at FOCUS Investment Banking.
Sellers – often family-owned businesses that have no next generation interested in running them – are looking to exit so they can reap the benefits of record profitability.For many, the last three years have been their most profitable in history, Brown adds.
The profitability stems from a semiconductor chip shortage that gathered pace early in the pandemic, crushing auto supply and keeping inventory low. Combined with high demand from consumers flush with stimulus checks, dealers have been able to mark up prices on new cars by 9.9% on average and in some cases by nearly 27%, according to iSeeCars.
Supply constraints are not expected to alleviate for “probably two to three years,” says Rolland. “It's going to take a while to work through this cycle.”
As these problems for the industry persist and inventories remain low, the consolidation trend could last well into the next few years, says Brown and Rolland.
Some of the large publicly listed auto dealers have been on a “buying frenzy” since the pandemic began, which puts pressure on the smaller groups to follow suit, Brown notes. Lithia Motors [NYSE:LAD] inked 12 deals since January 2020, compared with four in the preceding three years. Penske Automotive Group [NYSE:PAG] has made four deals since the pandemic’s early days, but two deals in 2017 to 2019. Although dealership price tags are often kept secret, Asbury Automotive Group [NYSE: ABG] has disclosed the highest spend of USD 3.9bn since January 2020, dominated by its USD 3.2bn deal for Larry H Miller Dealerships and Landcar Agency in September 2021.
Sonic Automotive [NYSE:SAH], another nationwide retailer, has a rollup strategy targeting individual new-car dealerships and locations for its used-car platform, its CFO told Mergermarket last December. Since then, Sonic has made two acquisitions.
In the face of all that consolidation by the larger groups, standalone dealerships are going to find it more difficult to remain profitable in the coming years, Brown says.
Throw in the demise of the internal combustion engine and the rise of electrification and autonomous driving, and the dealership landscape is “going to change more in the next decade than it has in the last 100 years,” says Brown.
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