INCLINE VILLAGE, N.V. – The auto dealership buy/sell market continued its record-breaking activity despite economic headwinds during the second quarter of 2022, up 16% compared to 2021, according to the just-released Blue Sky Report® by Kerrigan Advisors. There were 167 dealership buy/sell transactions reported in the first half of 2022, resulting in 406 transactions for the trailing twelve months ending June 2022 – a new industry high.
In the second quarter of 2022, average dealership blue sky values increased to a new record of $12.1 million, a $5.7 million increase in blue sky value since 2019, largely driven by record dealership earnings: for the 12 months ending June 2022, the average dealership earned an estimated $4.3 million, a 207% increase over the pre-pandemic average.
“Today, dealership balance sheets are flush with cash, with current assets nearly double current liabilities, and debt-to-equity is at historically low levels,” said Erin Kerrigan, Founder and Managing Director of Kerrigan Advisors. “Despite multiple unknown variables facing auto retail, the majority of dealers are looking to redeploy their tremendous cash flow back into the industry they know and love, resulting in more demand than supply of dealerships on the market today.”
Kerrigan noted that in the first half of 2022 more private buyers came in the market, and although there were more buyers than sellers, the number of sellers was also on the rise. “As the public retailers’ share of the buy/sell market declined, the largest private dealership groups remained focused on growing through acquisition. In fact, the largest private groups increased their share of the buy/sell market to more than double that of the publics.”
In the first half of 2022, private buyers accounted for 91% of franchises acquired and the top private dealership groups increased their share of the buy/sell market to 23% -- more than double the publics’ share of 9%. That’s a significant change from 2021, when the publics acquired 29% of franchises sold. Kerrigan Advisors believes that the decline in public spending may be attributed to compression of the publics’ stock prices.
International buyers are also on the rise in 2022. Globally, OEMs are rolling out a new retail agency model, where dealers serve as delivery agents for a set fee. In the US, the agency model faces significant scrutiny by many state associations, especially given state franchise laws. As a result, an increasing number of international dealers are seeking to acquire dealerships in the US where they feel their investment has stronger protections.
“The number of transactions completed by internationally-based acquirers is currently tracking to double last year’s volume. These buyers are highly attracted to the US franchise protections and consider a US franchise acquisition a much sounder investment than one in their home country,” continued Kerrigan. “In some cases, international buyers are willing to pay a price premium to enter the US market and are eager to deploy considerable amounts of capital into US dealership acquisitions.”
The Publics Decrease Acquisition Spending
Compared to the first half of 2021, US public auto retailers’ acquisition spending on US dealerships fell 49% and declined to just 9% share of the buy/sell market – a dramatic reversal from 2021 when the publics dominated the buy/sell market.
“The decline in the publics’ spending could be due to compression of their stock prices,” continued Kerrigan. “They allocated the majority of their capital to stock buybacks, rather than acquisitions in the first half of 2022, which was a reversal of their capital allocation in the first half of 2021.” During the first half of 2022, the six public auto retailers spent more than $2.2 billion on stock buybacks – a 97% increase over the first half of 2021.
Second Quarter 2022 Buy/Sell Trends
Kerrigan Advisors has identified the following three trends which it expects to meaningfully impact the buy/sell market for the remainder of 2022:
- Blue sky values become harder to assess as record earnings continue for third consecutive year
- Impact of rising interest rates begins to affect commercial real estate values
- International dealers increasingly seek US dealership acquisitions due to strength of franchise laws
Kia / Hyundai Franchise Demand; Ford Dealer Skepticism
While Kerrigan Advisors made no adjustments to its blue sky multiples for Q2 2022, the firm upgraded the multiple outlooks for Kia and Hyundai. “During the quarter, we saw a substantial increase in demand for Kia and Hyundai franchises,” said Ryan Kerrigan, Managing Director of Kerrigan Advisors. “Both franchises outperform the market in sales and earnings growth, and dealers are particularly satisfied with their product portfolios. Our expectation is that their multiples will increase in coming quarters if this trend continues.”
During the quarter, Kerrigan Advisors also noted a rise in Ford dealers considering a sale of their franchises. Early results from the 2022 Kerrigan Dealer Survey, which will be published in October, reflect an expectation that the Ford franchise will decline in value over the next 12 months. “We believe that this negative sentiment is a result of the announced changes to the Ford franchise model, particularly with electrification, and a growing distrust of the OEM’s plans for future dealership profitability,” continued Ryan Kerrigan.
Highlights from the Q2 2022 Blue Sky Report® by Kerrigan Advisors include:
- 167 dealership buy/sell transactions reported in the first half of 2022 resulting in 406 transactions for the twelve months ending June 2022.
- In the second quarter of 2022, average dealership blue sky value increased to a new record of $12.1 million, a $5.7 million increase in blue sky value since 2019.
- 42 multi-dealership transactions, representing 25% of the buy/sell market, closed in the first half of 2022, a decline of 18% relative to 2021. Kerrigan Advisors attributes the decline in multi-dealership transactions to rising interest rates and valuation declines in the stock market.
- Private buyers acquired 91% of franchises sold with the top 144 private dealership groups growing their share of the buy/sell market to 23%, more than double that of the publics.
- Domestic franchise share of the buy/sell market remains below 50% and is now 26% below their franchise market share of 66%.
- Import non-luxury franchises increased their share of the buy/sell market to 39% in the first half of 2022, demonstrating the strength of their business model and profit outlook.
- Nearly as many Toyota franchises traded hands as Chevrolet, Ford and CJDR, despite having 56% fewer franchises in the market.
- During the first half of 2022, public auto retailers spent more than $2.2 billion on stock buybacks – a 97% increase over the first half of 2021 and spending on acquisitions declined by 49% compared to the first half of 2021.
- The Kerrigan Index™ declined 16% year-to-date through July 2022, underperforming the broader market. With lower market capitalizations, acquisitions become more difficult for the publics to justify, in part because fewer are accretive to earnings.