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The Zacks Analyst Blog Highlights: Group 1, Sonic Automotive, Asbury Automotive, Lithia, and AutoNation

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·8 min read
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For Immediate Release

Chicago, IL – October 14, 2021 – Zacks.com announces the list of stocks featured in the Analyst Blog. Every day the Zacks Equity Research analysts discuss the latest news and events impacting stocks and the financial markets. Stocks recently featured in the blog include: Group 1 Automotive GPI, Sonic Automotive SAH, Asbury Automotive Group ABG, Lithia Motors LAD, and AutoNation AN.

Here are highlights from Wednesday’s Analyst Blog:

Is 2021 Shaping Up to Be Another Banner Year for Dealership M&As?

A wave of consolidation is sweeping across the auto retail industry. While vehicle purchases by consumers took a hit last year amid pandemic woes, buy-sell agreements among dealerships remained brisk. Per Kerrigan Advisors, a number of acquisitions in the auto retail space hit 289 last year, up 24% from 2019 levels, and marked the highest count in years.

The momentum continues this year, with dealership transactions up 27% year over year to 144 in first-half 2021, per Kerrigan. The dealership consulting firm expects a surge in deal making across the industry in the second half. Kerrigan predicts 350 total transactions this year. That would set a new record, and make 2021 the biggest and most memorable year for dealership merger & acquisition (M&A) activities in decades.

Key Deals So Far in 2021

A flurry of megadeals was witnessed in the auto retail industry, particularly in the last month. On Sep 13, Group 1 Automotive announced that it has inked an agreement to acquire Prime Automotive Group for about $880 million. Per the deal, which is expected to close by late November 2021, Group 1 will be purchasing 30 dealership locations and three collision centers throughout New England and the Mid-Atlantic region.

The company has been a success in the North-Eastern United States for many years, and this opportunity will enable it to take advantage of the existing cost structure and further diversify its U.S. foothold. The acquisition will increase the company’s global dealership count to 220. Year to date, Group 1 has completed $570 million of acquired revenues, and the proposed transaction is expected to take its total acquired revenues to at least $2.4 billion.

Ten days later, Sonic Automotive announced its decision to buy RFJ Auto Partners in a deal worth $700 million. The acquisition seeks to catapult Sonic into the top-five biggest dealership groups (in terms of revenues) in the United States. RFJ Auto's portfolio of 33 dealerships across seven states generated $2.8 billion in revenues in 2020.

The acquisition of RFJ Auto will add six new states (Idaho, Indiana, Missouri, Montana, New Mexico, and Washington) as well as five brands (Chrysler, Dodge, Jeep, Ram, and Mazda) to Sonic’s foothold and portfolio. Importantly, the deal is expected to add $3.2 billion to Sonic’s annual revenues. 

On Sep 29, Asbury Automotive Group agreed to buy Larry H. Miller Dealerships, the eighth largest dealership in the United States, and Total Care Auto (TCA) in a $3.2-billion deal that is expected to close later this year. The Larry H. Miller Dealership acquisition seeks to add nearly $5.7 billion in expected annualized revenues, giving the company an edge to execute its five-year plan of generating $20 billion in annual revenues by 2025.

Asbury claims to become the fourth-largest U.S. new vehicle retailer (in terms of revenues) after the deal closure. The acquired assets include 54 new and seven used vehicle dealerships as well as 11 collision centers. The buyout of TCA, a leading provider of service contracts and other vehicle protection products, will also enhance Asbury’s prospects.

In April, Lithia Motors — which has been on a long-standing buyout binge — announced the acquisition of Troy-based The Suburban Collection, which included 56 franchises, representing one of the biggest acquisitions by the auto retailer. The deal strengthened Lithia’s position in the North Central region and is expected to add $2.4 billion in the firm’s annualized revenues. Given Lithia’s spree of big and small deals this year, its total annualized revenues acquired in 2021 summed $6.2 billion.

In April, AutoNation also announced a deal to purchase 11 stores and a collision center from Peacock Automotive Group. The deal marked the first franchised dealership buyout since 2018 and will add $380 million in annual revenues. The acquisition has expanded AutoNation's footprint from coast to coast to more than 325 locations. 

What’s Behind This M&A Frenzy?

The process of buying cars has undergone a digital transformation, with online sales getting ever so popular, thanks to the pandemic. Auto dealers are ramping up their digital capabilities to make deals with customers and arrange for home deliveries of vehicles.

The race to invest vast sums in the e-commerce platform has gathered steam and companies that won’t be making the necessary efforts to step up their online game will be left behind. Retailers are thus vying for a wider reach and greater scale amid the changing operating dynamics of the industry.

In light of this scenario, big retailers that are flush with cash are seeking to scoop up smaller rivals in a hope that an increase in scale would help them lead digital transformation and boost competitive advantage. Dealers not only need to operate service departments with expensive and sophisticated equipment but are also supposed to have dual systems to service electric as well as conventional vehicles.

As such, capital requirements have increased and the relatively smaller companies would rather accept the takeover proposal than spend huge sums of money to reorient their business model. It’s not just the big businesses taking over the smaller ones. Even Larry Miller chose to be acquired, realizing the importance of scale and synergies, and that it would be better poised to reach new heights as part of a bigger organization than its own.

The dealership business is largely fragmented and dominated by small, individually-held operations. Per Kerrigan, the top 50 largest dealerships (in terms of new vehicle sales) in the United States accounted for just 16% of the nation’s total new vehicle sales last year.

Some dealers are of the view that the only way to survive long term is to get bigger. Then of course, there are commercial, financial and operating synergy gains from such deals. In addition, a highly competitive auto retail market is resulting in lesser-known and smaller dealer groups exiting the industry.

One of the dealership consulting firms Haig Partners sees Lithia’s deep focus on acquisitions as one of the catalysts for increased deal making across the industry. As we know, the company announced a five-year plan in July 2020 to generate $50 billion in revenues and $50 in earnings per share, primarily through acquisitions.

Quoting Alan Haig, the president of Haig, “I think the CEOs of other public retailers said whoa that strategy makes a lot of sense.”  Also, increasing dealership profitability and better access to capital have further boosted M&A activities since late 2020.

Merger Mania Unlikely to Slow Down

Asbury’s CEO Hult eyes more consolidation in the industry. The company remains committed to strategic buyouts that align with its customer-centric working model. Lithia has already been on an acquisition tear, in sync with its five-year plans. Sonic’s CEO Davi Smith also expects M&A activities to continue picking up. 

Certainly, a new era of dealership consolidation is underway. Erin Kerrigan, the MD of Kerrigan, is of the opinion, “that this is just the beginning of mega-transactions being announced over the next 12 months, assuming that the financial markets continue to support the financing of these kinds of acquisitions.”

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