Download - Aiada 2015 v2 (2)
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Dealerships Are Far Too Valuable To Be Sold Any Other Way
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• Buy/Sell Activity • Market Drivers• Valuation Trends • Questions
Overview of Session
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Buy Sell Activity Today Lots of Participants Entering the Maze
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Source: The Banks Report
Number of Transactions2013 versus 2014
2013 2014
114 Transactions
206 Transac-tions
81%
Increase
Acquisition Activity Grew 81% since 2013Buy/Sell Activity Increasing Monthly
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2013 2014
21
33
9
10
Public Private
30Transactions
43Transactions
21% of the closed transactions
Number of Multi-Dealership Transactions Grew 43% Since 2013Big Deals Are Getting Even Bigger
Source: The Banks Report
Number of Multi-Dealership Transactions 2013 versus 2014
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Public Company Spending More Than Doubled Through Oct. 1st 2014 Lithia Acquisition of DCH Represented 42% of Acquisition Spending in US
Source: SEC Filings
Public Dealership Group Acquisition Spending in USSince 2002
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Public21%
Private79%
Private Buyers are Much More Active Today Private Buyers Are Increasingly Capable of Completing Large Transactions
Source: The Banks Report
2014 Public versus Private Dealership Buyer Activity (% of Franchises Acquired)
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2006 2007 2008 2009 2010 2011 2012 2013
2022
1311
14
21
28
36
Over 3 Times More
Number of Private Groups with Greater than $1 Billion in Sales More than Tripled since 2009
Source: Automotive News
Number of Private Dealership Groups with Greater than $1B in Revenue
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Auto RetailAn Incredible Rebound
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Jan-10 Jul-10 Jan-11 Jul-11 Jan-12 Jul-12 Jan-13 Jul-13 Jan-14 Jul-145M
7M
9M
11M
13M
15M
17M
0.0% 0.5% 1.0% 1.5% 2.0% 2.5% 3.0% 3.5% 4.0% 4.5%
SAAR Average 10 Year Treasury Yield
Seas
onal
ly A
djus
ted
Annu
al S
ellin
g Ra
te10 Year U
S Treasury Yield M
onthly Average Yield
Auto Retail Sales are Highly Sensitive to Interest Rates SAAR is Negatively Correlated with Interest Rates
Source: Automotive News and Yahoo Finance
SAAR Versus 10-Year Treasury Yield
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20002001
20022003
20042005
20062007
20082009
20102011
20122013
$0$5,000,000
$10,000,000$15,000,000$20,000,000$25,000,000$30,000,000$35,000,000$40,000,000$45,000,000
8
10
12
14
16
18
20
Annual Unit Sales SAAR
Units in m
illion Fewer Dealerships = Sales per Dealership at Record Levels Industry Healthier than Ever
Source: NADA and Automotive News
Average Revenue per Dealership versus SAAR
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2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014$0
$200,000
$400,000
$600,000
$800,000
$1,000,000
$1,200,000 17.4 M 16.5 M
Average Dealership Earnings at Peak LevelsEarnings Far Above 2006 Levels, When Sales Were at 17 Million Level
Source: NADA and Kerrigan Advisors Analysis
Average Dealership Earnings
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Low Yield Investment EnvironmentUnlevered Dealership Returns Look Very Attractive
Source: Bloomberg, Morningstar, and Kerrigan Advisors Analysis. Analysis assumes average multiples and no improvement in earnings or leverage – working capital and assets represent 1 times earnings.
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$0
$10
$20
$30
$40
$50
$60
$70
AutoNation’s Stock Price Relative to Bond Yield
Autonation 6.75% bonds with 2018 Maturity. Fixed coupon paid semi-annually
6.0 %
4.5 %
3.0 %
1.5 %
0.0 %
Bond
Yie
ld
2010 2011 2012 2013 2014
Stock Price
Volume
Cost of Capital Single Biggest Driver of Current Valuations Auto Retail Risk Low and Consolidation Opportunity High
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Buyers and Sellers Ready to Make a Deal
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EXTERNAL FACTORS
Industry ConditionsOEM PerformanceFinancial Markets
Domestic Economy
INTERNAL FACTORS
Current ProfitsManagement
FacilitiesSales Effectiveness
Biggest Driver of Buy/Sell Market – External Factors Internal Factors Are Irrelevant, if External Factors Aren’t Strong
Source: NADA
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Average Dealership Estimated ValueEstimated Blue Sky Value 2004 2014Average Pre-Tax Earnings Per NADA $0.6 M $1.1 MBlue Sky Multiple 3.50x 4.50x
Est. Blue Sky Value Plus Working Capital and Assets (1) $2.5 M $6.2 M
Estimated Property ValueEstimated Dealership Rent Expense $0.3 M $0.4 M
Est. Property Value (2) $3.7 M $5.7 M
Estimated Total Value $6.2 M $11.9 M
(1) Includes working capital and assets equal to 1.0x dealership earnings
(2) Assumes property valued at a 9% cap rate in 2004 and 7.5% cap rate
Value of Average Dealership Group
2004 2014
$18.6 M
$35.6 M
91% Increase
Assumes 3 dealerships per group
Values Have Risen ConsiderablyThe Average Deal is A Big Deal
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2006 2014
$43.3 M
$117.2 M$80.3 M
$107.9 M
Blue Sky Value Property Value
Average Blue Sky and Property Values Automotive News No. 11- 125 Dealership Groups
$123.6 M
$225.1 M
Values Have Risen ConsiderablyThe Larger Groups’ Average Value Estimated at $225M
Source: Automotive News 2014 Top 125 Dealership Group List
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Estimated Number of Acquisitions by the Public Dealership Groups Valued Above $50 Million
2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014
5
2
5 5
23
13
12
1
1
22
1
Estimated Transactions between $50M and $100M Est. Transactions Greater than $100M
36 in 11 years – average less than 4 per year
Publics’ Ability to Make Large Acquisitions LimitedOnly 36 since 2004
Source: SEC Public Filings and Kerrigan Advisors Analysis
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Public Companies’ Capital AllocationYTD 3Q 2014
Public Alternative Investments
AutoNation AutoNation Direct Stock buybacks Branded F&I products
Penske Commercial truck dealerships International investments
Group 1 International investments
Sonic Used car platform One-Sonic-One platform Captive finance company
Asbury Used car platform
Publics Have Options for Their Capital and Limits on Acquisitions Stock Buy Backs, International Investments, New Business Ventures
Source: SEC Filings
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“This is just the beginning for Berkshire Hathaway Automotive.”
Warren Buffet, October 2nd, CNBC
New Capital Investors Meet Dealers Need for Exit OptionsCharacteristics of Auto Retail Ideal for Private Equity
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Six Publicly-Traded Dealerships
Top 20 Dealership Grps Top 125 Dealership Grps
5.0%
8.0%
16.4%
Dealership Market Share
83.6% of dealerships ownedBy small groups and individuals
Highly Fragmented Industry - A Lot of Room for ConsolidationTremendous Opportunity to Grow Through Acquisition
Source: Automotive News
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2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013
24.3%
30.7%27.6%
25.1% 24.3% 23.5% 22.7% 22.0%
12.4%
18.0%
24.8%28.0% 27.8% 29.0%
Average Dealership Return on Equity
24.8%
Industry Consistently Produces VERY High Return on EquityHighly Attractive to Outside Capital
Source: NADA
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High Net Worth
- Evergreen capital
- Entrepreneurial- Owner operator
or partner with management
Family Office
- Evergreen capital
- Professional management
- Partner with management
Private Equity
- Short-term capital
- Professional management
- Partner with management
Public Conglomerate
Leucadia National Corporation
- Evergreen capital
- Professional management
- Partner with existing dealers
Overview of New Entrants Characteristics of Auto Retail Ideal for Private Equity
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Analysis assumes working capital and assets represent 1 times earnings.
Required Growth in Pre-Tax Earnings Year 1Pre-Tax ROI # 3% 25% 50% 100%
10% ## 9.3x 11.5x 14.0x 19.0x15% ## 5.9x 7.3x 9.0x 12.3x20% ## 4.2x 5.3x 6.5x 9.0x25% ## 3.1x 4.0x 5.0x 7.0x
Private EquityHigh Net Worth Investors, Family Office,
Public Conglomerates
Returns Meet Private Equity and Family Office ExpectationsFamily Office Versus Private Equity
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Kerrigan Advisors Blue Sky Multiples – Fourth Quarter 2014 Top Volume Franchises Command Higher Multiples
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Kerrigan Advisors Blue Sky Multiples – Fourth Quarter 2014 Top Luxury Multiples Have Few Limits
* Note: Jaguar would command the lower multiples and Land Rover would command the higher
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Mercedes-Benz BMW Audi Lexus Porsche
366339
283
235
189
Number of Franchises
Compares to over3,000+ Chevrolet and 3,000+ Ford franchises
Limited Supply of Luxury Franchises Results in Incredible Values Economics 101
Source: Automotive News
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Source: SEC Filings and Kerrigan Advisors Analysis – apply 7.5% cap rate to real estate holdings
Estimated Public Company Blue Sky Multiples Q1 2015
Average Private Company Multiples: 5x
Public Blue Sky Multiples Reflect Liquidity Premium Average Private Multiple ~50% of Public Multiples
Source: The Banks Report
AUTOMOTIVE FY2014 MULTIPLES AUTOMOTIVE FY2014 MULTIPLES
($ in millions) TotalMarket Cap (as of 3/31/15) $20,226Net Assets (1,202) Est. Blue Sky 19,024
Operating Income 2,505 Rent Adjustment (536) FY Adjusted EBIT $1,969Blue Sky Multiple 9.7x
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LowUnit Sales
Per Dealership
High Blue Sky
Multiples
LowBlue SkyMultiples
HighUnit Sales
Per Dealership
Profits Driven by Franchise
Profits Driven by Operator
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ManufacturerMoody's Credit
RatingCredit Rating Description
Toyota/Lexus Aa3 Very High QualityHonda A1 High QualityBMW A2 High Quality
Mercedes A3 High QualityVW/Porsche/Audi A3 High Quality
Nissan A3 High QualityHyundai/Kia Baa1 Medium Quality
GM Baa1 Medium QualityFord Baa3 Medium Quality
Chrysler B1 Speculative
Manufacturer’s Financial Strength – A Factor that Drives Blue Sky Value The Higher the Credit Rating, The Higher the Multiple
Source: Moody’s and Kerrigan Advisors
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Average Blue Sky Multiple
AdjustedBlue Sky Multiple
Earnings Growth Expectations
Buyer Demand
Real EstateMarket Vehicle
Preference
Higher Multiple
Lower Multiple
LowGrowth
LowDemand
High Rent/Building Project
FranchiseUnsuitable
FranchiseHighly
Suitable
HighGrowth
HighDemand
Low Rent/Image
Drivers of Franchise Multiple Variability Four Key Factors
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2010 2011 2012 2013 2014 2015E 2016E10
11
12
13
14
15
16
17
18
11.6M
12.8M
14.4M
15.5M
16.5M17M 17.4M
Annual Vehicle Sales Sales Growth Rate
FON
12%
10%
13%
8%
6%
4%
1%
Annual Auto Sales and % Growth
Return to 17.4 Million Sales Means Slower Future Growth Sales Rebound Near Completion?
Source: Automotive News and Kerrigan Advisors Analysis/Estimates
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Change in Average Dealership Pre-Tax Earnings Year over Year
Dealership Earnings Growth is Slowing Indicator Valuations Reaching Peak Levels
Source: NADA
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Public Dealership Groups’ Average P/E Multiple
26% Decline
22.2x
16.5x
Public P/E Multiples Down 26% Since 2010 Leading Indicator for Private Multiples?
Source: Yahoo Finance
March
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Dec 0
9
Mar
10
Jul 1
0
Oct
10
Jan
11
Apr 1
1
Jul 1
1
Oct
11
Jan
12
Apr 1
2
Jul 1
2
Oct
12
Jan
13
Apr 1
3
Jul 1
3
Oct
13
Jan
14
Apr 1
4
Jul 1
4
Oct
14
Jan
15
Apr 1
580
130
180
230
280
330
380
430
480
S&P 500 Public Auto Dealerships
Public Dealership Stock Index Compared to the S&P
4x higher
Public Dealership Stocks Outperform the S&P 500 Wall Street Thinks Auto Retail is a Great Investment
Source: Yahoo Finance
+341.1%
+84.4%
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A Premier Advisor to Sellers of High Value Dealerships