An update on the current M&A market and the current and future impacts of the pandemic.
We’ve received many questions recently regarding how COVID-19 has impacted the dealership M&A market. The short answer is: the M&A markets are currently wide open, and we are seeing significant deal flow, but it is too soon to tell what the mid- and long-term impact will be. To be sure, the pandemic initially delayed closings for us, as we’re sure it did for others. But all our “pre-COVID” transactions have either closed or are on track to close soon. Dealership buy sells generally take at least six months to complete, so the true impact will be more apparent beginning in 2021. For the remainder of 2020, we expect the dealership M&A market to be very healthy.
We had a number of transactions scheduled to close in March, April and May. Nearly all were delayed, most famously of course, Asbury Automotive Group’s acquisition of Park Place Dealerships. It was called off in March, a victim of pandemic-induced uncertainty. As an indicator of the overall health of the dealership market, after the first deal fell through, we received a flood of inquiries about Park Place from various strategic and financial buyers. In the end, Asbury consummated the transaction and the deal officially closed on August 24. We also completed the sale of the John Eagle dealerships in August. By the end of August, we will have closed on the sale of 35 dealerships totaling over $2 billion in transaction value this year to date.
While some sellers purely transact based on factors such as geopolitical, economic or opportunistic timing, retail automotive buy sell market activity is more often a function of demographics. Moreover, we see many dealers decide to sell that lack succession or a longterm, generational growth plan. These forces have been driving consolidation in the dealership world for some time. The disruption caused by COVID-19 may have reminded some dealers who were thinking of selling that the world is a very uncertain place.
The acceleration of digitalization of the dealership sales process brought on by the pandemic, which requires capital and the desire to change, is another area that will likely accelerate consolidation. Some dealers have dragged their feet on offering a digital sales experience. COVID-19 accelerated the need for digitalization from years to weeks. To be competitive, dealerships now must offer a fast, easy online sales and service experience.
Another factor is the looming specter of some potentially significant disruptive changes facing the automotive industry. Consumer mobility is going to change, and in ways that may not be positive for the dealership business model in the long run. While the timeline is uncertain, electrification is here, and autonomous vehicles are coming. When autonomous vehicles do arrive, they will obviate the need for personal vehicles. For now, other disruptive forces such as rideshare and subscription services have themselves been disrupted given the current desire for safety in personal mobility. Only time will tell how these and other long-term disruptive forces will impact the retail automotive model, but ultimately disruption is not going to disappear. All of this is in the back of dealers’ minds, as well.
Despite these uncertainties, dealerships are still seen as a good investment by many dealers and savvy investors for several reasons:
The pandemic has proven the flexibility of the dealership model and dealers’ ability to adapt during periods of low (or in the case of COVID, no) activity. Dealers reduced or eliminated highly variable expenses such as commissions and advertising, two of the larger non-fixed expenses dealerships incur, by reducing staff and shifting to online sales. As showrooms have reopened, many dealers have kept the lower staffing and variable expense levels. That has allowed more gross profit to flow to the bottom line and some dealers are seeing record profit levels.
Historically low interest rates and availability of debt fuel consumer demand and provide dealers low cost of capital and result in solid returns on investment. While the pandemic hurt dealership sales for a few months, low rates, coupled with OEM incentives and pent up demand, provided for an ironic sales boost.
Safety in personal mobility has resulted in more miles driven and many new, first-time buyers. A recent Cars.com survey found 62% of Americans say they are suspending public transit in favor of the safety of a personal vehicle. Of those surveyed, 21% purchased a car in the last six months, and 57% said it was due to the pandemic. The personal vehicle is again king!
Back to the question of how COVID-19 has impacted the dealership M&A market. Given the strength and resiliency of the dealership model, we expect the remainder of 2020 to be robust with many additional closings related to deals already in process. We are also seeing a real time uptick in deals coming to market. Buyer demand remains strong, with many existing and new buyers looking for dealership acquisition opportunities. The result is a balanced market between supply and demand, for now. Economic, geopolitical and continued pandemic related issues may, at some point tip the scales, but timing the markets is as difficult as it is with general investing, so we will see.
The Presidio Group provides M&A advisory services through its wholly owned investment bank, Presidio Merchant Partners LLC, Member FINRA and SIPC.
Founder and CEO
Mr. Cobb founded The Presidio Group in 1998 with the simple goal of bringing transparent advice to entrepreneurs and the lifecycle of their wealth building process. To that end, he formed three different business groups within Presidio to address each part of that lifecycle: private equity, investment banking, and wealth advisory. The firm grew to 70 employees in three offices (San Francisco, Dallas, and Washington DC) until 2016, when Presidio was reorganized and the wealth advisory business was merged with a similarly-sized RIA in New York called Tiedemann Advisors. Today, Tiedemann is one of the nation’s largest RIA’s with over $20 Billion in assets under management. Mr. Cobb is a significant shareholder and sits on Tiedemann’s Board. In the 2016 reorganization, Presidio also spun out its private equity group while retaining an economic interest.
Prior to Presidio, Mr. Cobb was with Montgomery Securities, First Boston Corporation, and Security Pacific Bank. He earned an M.B.A. from the University of Texas and B.A. degree from Tulane University. He competed for a spot on the US Olympic Team in 1988 and still races sailboats and bicycles and lives in San Francisco.
George shares oversight of the firm’s M&A and corporate finance activities and manages the Atlanta office. George is a seasoned automotive industry executive with over 20 years of experience in automotive retail, M&A, and real estate development.
Prior to joining Presidio, George spent over 18 years as an executive at Asbury Automotive Group (NYSE: ABG), helping to build it into one of the largest automotive retailers in the U.S. He most recently served on Asbury’s executive team as Senior Vice President of Corporate Development & Real Estate and managed hundreds of M&A and real estate transactions as well as many of Asbury’s strategic sourcing initiatives. George began his career at Arthur Andersen in its transaction advisory services group where he provided M&A advisory support to private equity and strategic buyers across many industries including automotive retail. George graduated magna cum laude from Seton Hall University with a B.S. in accounting. He lives in Atlanta with his wife and two children.