Automotive News Canada - January 2023 - 17

Q: Another trend is the so-called agency model,
where the automaker retains ownership of the
vehicle while the dealer is the in-person touchpoint
with the customer. Does this make dealerships
more attractive to M&A activity?
Heasty: The introduction of the agency model in various
forms continues to fuel uncertainty; it is unclear
what this would do to dealer profitability. Therefore,
from an M&A perspective, the uncertainty continues to
promote activities from the sell side. This is just another
variable in the decision-making process for those dealers
who are contemplating monetizing their assets.
Robertson: It is a very uncertain time regarding the
agency model. For years, OEMs have required specific
acreage and square footage for their dealerships. If agency models gain
traction, how will OEMs manage their dealer partners that have, say, five or six
acres of land and a 60,000-square-foot facility when they now will require only a
half-acre and 12,000 square feet? It will be a very interesting dynamic and we will
be watching intently to see who makes the move first out of the major OEMs.
Ahmad: I think it makes them less attractive. Although we've seen some
recent announcements from manufacturers that want to go forward with a
direct-to-customer sales approach, strong dealer-rights legislation in the United
States will likely prevent this from happening in a widespread fashion.
Q: Will the consolidation trend continue into 2023? Has the business case
for consolidation changed over the past year?
Robertson: We believe the consolidation trend will continue into 2023. It has
become more important than ever to have scale and take advantage of synergies
across dealer groups. Additionally, dealer groups don't want to miss out on
the good opportunities and be left behind in the growth race. So, it will remain
a very competitive buy-sell space in the high-demand markets.
Ahmad: It definitely will continue for a car brand that organizations absolutely
want in their network. For example, if a Ford dealership became available at a
great price, somebody would make the acquisition this year. Conversely, if a
Toyota dealership became available - and it was still at a " normal " asking price
- some organization desperate to have Toyota in their network or dealer group
also would buy it. If somebody owns a pretty average brand and asks for top
dollar, I think they'd be disappointed in the sale result.
As for the business case changing, not really. Buyers ask if a dealership will be
a fit for them regionally, brand-wise, or profit-wise. You may see many more
sales in 2023 because the brand doesn't support a dealer group's future strategy.
For example, some may want to go with luxury brands only and dispose
of their domestic dealerships.
Heasty: Yes, the consolidation trend will continue and no, the business case
has not changed. With a lot of cash waiting to be deployed, the inventory of
small dealer groups is shrinking, which puts pressure on the consolidators
to continue buying to ensure they still get the " meat-and-potatoes " deals as
opposed to table scraps.
Q: Should we expect more U.S. dealership groups to try to acquire
Canadian dealerships in 2023? Conversely, will more large retail groups in
Canada pursue acquisitions in the United States?
Ahmad: That's been a huge question. I say you will not see a big flurry of
American groups buying in Canada because we don't offer large population
centers and our dealer agreements do not favor the dealer in Canada, like they
do in the U.S. Contrarily, Canadian dealers are a bit of a bargain because of the
strength of the U.S. dollar.
If the price of dealer valuations drops in 2023, I expect Canadian dealer acquisitions
in the U.S. will continue.
"
Heasty: No, I think U.S. groups will not be actively looking to acquire Canadian
dealerships. It's the same historical principle that our market is too small and
there is already enough competition between Canadian dealership groups.
There is no real reason for Americans to pay over the money in an effort to
outbid Canadians. In my opinion, the Lithia purchase of Pfaff was a one-off
occurrence and had everything to do with the fact that Pfaff is heavily weighted
with a number of ultra-premium brands. That type of opportunity is few and far
between in Canada.
If anything, the
impact of the economy
in 2023 will push
dealers to make buy/sell
decisions sooner than
later.
"
- Farid Ahmad, DSMA
I do expect large retail groups in Canada to continue
looking south of the border. It's just pure mathematics;
the market south of us is ten times as big as ours
and the opportunities in Canada for multi-rooftop
transactions of an adequate critical mass is decreasing
as the consolidation continues. Also, multiples
are less in the U.S.
Robertson: We do not feel there will be any additional
increases in U.S groups acquiring in Canada.
Many are still looking but have been very disciplined
in their strategy north of the border. But I believe there
remains substantial interest for Canadian groups to
pursue acquisitions in the US. Vacation homes, tax
structure, competition, market saturation and lower
multiples all impact dealers' desires to acquire south of the border.
Q: What's one key M&A trend you're watching in 2023? And did the M&A
environment for the past year play out as anticipated?
Heasty: I'm really not expecting any significant changes. But I would advise
buyers who are pondering whether the uncertainty of the coming year opens
the door to a more palatable price point may instead find the door is shut. Why?
Because there's likely another buyer that will pay the price without consideration
of a turbulent single year. And that buyer will have another trophy for his
or her mantelpiece that produces a more than acceptable rate of return and will
not miss a beat in gaining market share.
Robertson: One M&A trend we will be watching in 2023 is the amount of
small to mid-sized groups that sell. We believe the appetite has increased for
larger groups to grow faster, rather than one-off transactions. The M&A environment
provided some surprises in 2022, but very much followed the trend
that many M&A experts anticipated.
Ahmad: During the last five years, we've completed more than 1,500 dealership
valuations, most of which stemmed from dealers retiring. We feel dealers
will continue to contemplate if it's time to get out. The volume of transactions
was much higher than we expected in 2022 and the economic changes also
encouraged people to make decisions more quickly.
ABOUT THE PANELISTS
FARID AHMAD
Founder and Chief Executive Officer of DSMA
With more than 35 years of global auto-industry experience, Farid is considered
a genuine industry expert by dealers & OEMs alike, with his finger on the pulse
of the automotive marketplace across North America. DSMA is an automotive
intelligence and M&A advisory service with 1,000-plus years of combined industry
experience and more than 1,500 valuations and 360 transactions completed.
PETER HEASTY, CPA, CA
President of Baker Tilly Dealer Acquisitions Inc.
Peter Heasty's career spans more than 30 years in the automobile-dealership
industry. He has operated as chief financial officer of a large dealer group, as
well as dealer principal of his own operations. Heasty is an expert in dealership
transactions, providing clients with a unique combination of skills in negotiation,
asset valuation and goodwill, providing clients with a full-service, one-stop shop.
LANDON ROBERTSON, CPA, CMA
Director of Operations and Corporate Strategy, Templeton Marsh
Robertson facilitates and manages the buy/sell process and strategic direction
of Templeton Marsh. He began his career at AutoCanada, where he spent
more than six years holding various roles, including manager of acquisitions
and director of corporate development. With more than 50 dealership and real
estate buy/sells completed in his career, Robertson has been responsible for
all aspects of strategic acquisitions, from inception through due diligence, valuation,
financing, negotiation, closing and post-acquisition integration.
Automotive News Canada - January 2023

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