M&A among car dealers expected to reach record levels in the second half of the year

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Car dealerships saw a drop in sales during the height of the pandemic from the slowdown in production with less people driving, and that impacted some deals. For example, Asbury Automotive Group Inc. (NYSE: ABG) originally backed away from its $1 billion acquisition of Park Place Dealerships. However, citing a pickup in business, Asbury revived the deal for $735 million. Now some dealmakers are predicting robust sector dealflow in the second half of 2020. Mergers & Acquisitions spoke with Erin Kerrigan, managing director of auto dealership-focused investment bank Kerrigan Advisors about deal trends in the industry.

How has the pandemic impacted the auto dealership sector?
The pandemic has dramatically impacted auto retail both from a positive and negative standpoint, with the positives outweighing the negatives. The clear negative was the economic shutdown of April and March. However, the positives are the incredible sales rebound in May, June and July, coupled with strong gross profits and lower variable expenses.

We expect the second half of 2020 to be a highly profitable one for most auto retailers. The pandemic has highlighted the resilience of the auto retail business model, particularly dealers’ ability to increase gross margin and reduce expenses quickly to grow profits, despite a decline in new vehicle sales.

What is the industry doing to bounce back?
Dealers are increasing their used vehicle sales, which are much higher margin than new vehicles, and improving the efficiency of their operations by reducing headcount. Most dealers have also focused on increasing gross margins on both new and used vehicles and F&I, resulting in a rebound in profits to pre-pandemic levels in June.

How are dealerships adjusting to changes in consumer behavior?
They are quickly ramping up their digital retailing efforts and creating touchless sales processes.

What other subsectors in auto have been affected?
Used vehicle sales have risen tremendously as new vehicle inventory slims down due to production delays.

What is your forecast for M&A for the balance of 2020?
We expect M&A to reach record levels in the second half of the year as buyers are bullish on the industry’s earnings growth, attracted to auto retail’s resilient business model, and able to capitalize on the low cost of capital in today’s low interest rate environment. We are also seeing more sellers coming to market and ready to exit at today’s high prices, particularly those without a clear succession plan.

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