Dealerships Are Far Too Valuable To Be Sold Any Other Way
Dealers Edge WebinarApril 21, 2015
• Buy/Sell Activity • Market Drivers• Valuation Trends
Overview of Session
Buy Sell Activity Today Lots of Participants Entering the Maze
Source: The Banks Report
Number of Transactions2013 versus 2014
Acquisition Activity Grew 81% since 2013Buy/Sell Activity Increasing Monthly
2013 2014
114 Transac-tions
206 Transac-tions
81% Incre
ase
2013 2014
21
33
9
10
Public Private
Source: The Banks Report
Number of Multi-Dealership Transactions 2013 versus 2014
Number of Multi-Dealership Transactions Grew 43% Since 2013Big Deals Are Getting Even Bigger
21% of the closed transactions
Source: SEC Filings
Public Company Spending More Than Doubled Through Oct. 1st 2014 Lithia Acquisition of DCH Represented 42% of Acquisition Spending in US
Public Dealership Group Acquisition Spending in USSince 2006
Source: The Banks Report
2014 Public versus Private Dealership Buyer Activity (% of Franchises Acquired)
Private Buyers are Much More Active Today Private Buyers Are Increasingly Capable of Completing Large Transactions
Public21%
Private79%
2006 2007 2008 2009 2010 2011 2012 2013
2022
1311
14
21
28
36
Source: Automotive News
Number of Private Dealership Groups with Greater than $1B in Revenue
Over 3 Times More
Number of Private Groups with Greater than $1 Billion in Sales More than Tripled since 2009
Auto RetailAn Incredible Rebound
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
Source: Automotive News and Yahoo Finance
SAAR Versus 10-Year Treasury Yield
Auto Retail Sales are Highly Sensitive to Interest Rates SAAR is Negatively Correlated with Interest Rates
Source: NADA and Automotive News
Average Revenue per Dealership versus SAAR
Fewer Dealerships = Sales per Dealership at Record Levels Industry Healthier than Ever
2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013$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
20002001
20022003
20042005
20062007
20082009
20102011
20122013
2014 Annualized
0
200,000
400,000
600,000
800,000
1,000,000
1,200,000
Source: NADA and Kerrigan Advisors Analysis
Average Dealership Earnings
Average Dealership Earnings at Peak LevelsEarnings Far Above 2006 Levels, When Sales Were at 17 Million Level
17.4 M 16.5 M
Floorplan
Finan
cing
US 10-Ye
ar Tre
asury
Corporate B
onds
High Yi
eld
S&P 500 10-Ye
ar Avg
MSCI R
eal E
state
10-Yr
Dealer
ship Retu
rns - Lu
xury
Multiples
Dealer
ship Retu
rns - N
on-Luxu
ry Multiples
2.0% 2.4% 3.1% 6.1%
8.0% 8.0%
15.8% 20.0%
Bonds
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.
Low Yield Investment EnvironmentUnlevered Dealership Returns Look Very Attractive
AutoNation’s Stock Price Relative to Bond Yield
Autonation 6.75% bonds with 2018 Maturity. Fixed coupon paid semi-annually
Cost of Capital Single Biggest Driver of Current Valuations Auto Retail Risk Low and Consolidation Opportunity High
6.0 %
4.5 %
3.0 %
1.5 %
0.0 %
Bond
Yie
ld
2010 2011 2012 2013 2014
$0
$10
$20
$30
$40
$50
$60
$70Stock Price
Volume
Buyers and Sellers Ready to Make a Deal
EXTERNAL FACTORS
Industry ConditionsOEM PerformanceFinancial Markets
Domestic Economy
INTERNAL FACTORS
Current ProfitsManagement
FacilitiesSales Effectiveness
Source: NADA
Biggest Driver of Buy/Sell Market – External Factors Internal Factors Are Irrelevant, if External Factors Aren’t Strong
Values Have Risen ConsiderablyThe Average Deal is A Big Deal
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 Larger Groups’ Average Value Estimated at $225M
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
Source: Automotive News 2014 Top 125 Dealership Group List
Publics’ Ability to Make Large Acquisitions LimitedOnly 36 since 2004
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
1
3
12
1
1
2
2
1
Estimated Transactions between $50M and $100M Est. Transactions Greater than $100M
Source: SEC Public Filings and Kerrigan Advisors Analysis
36 in 11 years – average less than 4 per year
Public Companies’ Capital AllocationYTD 3Q 2014
Publics Have Options for Their Capital and Limits on Acquisitions Stock Buy Backs, International Investments, New Business Ventures
Source: SEC Filings
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
“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
Six Publicly-Traded Dealerships
Top 20 Dealership Grps
Top 125 Dealership Grps
5.0% 8.0%
16.4%
Dealership Market Share
Highly Fragmented Industry - A Lot of Room for ConsolidationTremendous Opportunity to Grow Through Acquisition
Source: Automotive News
83.6% of dealerships ownedBy small groups and individuals
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%
Industry Consistently Produces VERY High Return on EquityHighly Attractive to Outside Capital
Average Dealership Return on Equity
24.8%
Source: NADA
Returns Meet Private Equity and Family Office ExpectationsFamily Office Versus Private Equity
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 Equity Family Office
Kerrigan Advisors Blue Sky Multiples – Fourth Quarter 2014 Top Volume Franchises Command Higher Multiples
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
Limited Supply of Luxury Franchises Results in Incredible Values Economics 101
Number of Franchises
Source: Automotive News
Mercedes-Benz
BMW Audi Lexus Porsche
361338
280
234
189
Compares to over3,000+ Chevrolet and 3,000+ Ford franchises
Source: SEC Filings and Kerrigan Advisors Analysis – apply 7.5% cap rate to real estate holdings
Estimated Public Company Blue Sky Multiples Q1 2015
Public Blue Sky Multiples Reflect Liquidity Premium Average Private Multiple ~50% of Public Multiples
AUTOMOTIVE Q4:FY2014 MULTIPLES AUTOMOTIVE Q3:FY2014 MULTIPLES
($ in millions) Total
Market Cap (as of 12/31/14) $18,807Net Assets (1,585) Est. Blue Sky 17,222
Operating Income 2,414 Rent Adjustment (474) LTM Adjusted EBIT $1,940Blue Sky Multiple 8.9x Average Private Company Multiples: 4.5x
PLEASE UPDATE Market Cap for March 31, 2015
LowUnit Sales
Per Dealership
High Blue Sky
Multiples
LowBlue SkyMultiples
HighUnit Sales
Per Dealership
Profits Driven by Franchise
Profits Driven by Operator
Source: Moody’s and Kerrigan Advisors
Manufacturer’s Financial Strength – A Factor that Drives Blue Sky Value The Higher the Credit Rating, The Higher the Multiple
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
Average Blue Sky Multiple
AdjustedBlue Sky Multiple
Earnings Growth
Expectations
Buyer Demand Real Estate
Market 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
2010 2011 2012 2013 2014 2015E 2016E10
11
12
13
14
15
16
17
18
0%
2%
4%
6%
8%
10%
12%
14%
11.6M
12.8M
14.4M
15.5M
16.5M17M 17.4M
Annual Vehicle Sales Sales Growth Rate
Source: Automotive News and Kerrigan Advisors Analysis/Estimates
Return to 17.4 Million Sales Means Slower Future Growth Sales Rebound Near Completion?
FON
12%
10%
13%
8%
6%
4%
1%
Annual Auto Sales and % Growth
33Source: NADA
Change in Average Dealership Pre-Tax Earnings Year over Year
Dealership Earnings Growth is Slowing Indicator Valuations Reaching Peak Levels
Source: Yahoo Finance
Public Dealership Groups’ Average P/E Multiple
28% Decline
Public P/E Multiples Down 28% Since 2010 Leading Indicator for Private Multiples?
22.2x
16.0x
PLEASE UPDATE IF RELEVANT
Source: Yahoo Finance
Public Dealership Stock Index Compared to the S&P
Public Dealership Stocks Outperform the S&P 500 Wall Street Thinks Auto Retail is a Great Investment
Jan 10Jul 10 Jan 11Jul 11 Jan 12Jul 12 Jan 13Jul 13 Jan 14Jul 1480
130
180
230
280
330
380
430
480
S&P 500
+81.7%
+324.9%
4x higher
PLEASE update
“It did take a Clinton to clean up after the first Bush, and I think it might take another one to clean up after the second Bush.”
Hillary ClintonCNN debate between Clinton and Barack ObamaJanuary 31, 2008