Second Quarter 2021 - Kerrigan Advisors
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Second Quarter 2021 September 2021
Contact Erin Kerrigan: (949) 439-6768 | erin@kerriganadvisors.com
Contact Ryan Kerrigan: (949) 728-8849 | ryan@kerriganadvisors.com
www.KerriganAdvisors.com
Securities offered through Bridge Capital Associates, Inc., Member FINRA, SIPC
To register to receive The Blue Sky Report® digitally each quarter, please visit www.KerriganAdvisors.com/The-Blue-Sky-Report
What the Largest Groups Have
to Say About Kerrigan Advisors
HOWARD KEYES, PRESIDENT OF KEYES AUTOMOTIVE GROUP
“Kerrigan Advisors’ track record of success selling
the largest dealership groups in our industry, along
with their deep expertise navigating and advising on
complex, multi-dealership transactions, was truly
invaluable to achieving our goals.”
JOHN FIELDS, OWNER OF FIELDS AUTOMOTIVE GROUP
“We hired Kerrigan Advisors because we knew they
would not only find the right buyer, they would also
actively manage the sale process and ensure a smooth
closing. No other sell-side advisor understands the
fluctuations of the auto retail market the way Kerrigan
Advisors does—and few if any understand the value of
dealerships and blue sky as well as they do.”
DAVID SMITH, CSO OF LARRY H. MILLER MANAGEMENT CORPORATION
“We chose Kerrigan Advisors due to their expertise
executing transactions within the automotive industry.
Kerrigan Advisors’ team exceeded our expectations
with a high degree of professionalism and a total
commitment to meeting our company’s strategic goals
for this transaction.”
HAL EARNHARDT, CO-OWNER OF EARNHARDT AUTO CENTERS
“Kerrigan Advisors identified the perfect buyer for our
stores, one that appreciated the value of entering the
Phoenix market with great import brands. Kerrigan
Advisors was critical to the success of this transaction.”
Professional. Confidential. Proven. www.KerriganAdvisors.com
(775) 993-3600
© 2021 Kerrigan Advisors. All rights reserved.
Securities offered through Bridge Capital Associates, Inc., Member FINRA, SIPC
The Blue Sky Report
1
Second Quarter 2021
DEALERSHIP ACQUISITION ACTIVITY
The buy/sell market over the last 12 months has been nothing short of extraordinary. Since the economy reopened
in June 2020, the number of auto dealership buy/sells completed hit a record 320 through June 2021 (see Chart
I). At the current run rate, Kerrigan Advisors expects 2021 to exceed 2020’s transaction count by a significant
margin, making this year the most active in history.
Chart I | Total Number of Completed Dealership Transactions
320
289
242 233
221 216 2021 buy/sells are already at
202
record numbers, exceeding
144 2020 by 27%, marking the
113 +27% highest number of buy/sells
for a half year period since
Kerrigan Advisors started
tracking the data.
2015 2016 2017 2018 2019 2020 TTM Jun- First Half First Half
2021 2020 2021
Source: The Banks Report, Automotive News, Kerrigan Advisors’ Research
Note: A transaction can include multiple franchises and is defined as one buyer and one seller.
“The acquisition market is probably as frothy as it’s ever been.”
Earl Hesterberg, President & CEO, Group 1 Automotive
Second Quarter 2021 Earnings Call
Today’s activity level is a byproduct of the industry’s explosive profitability. In the first half of 2021, the average
dealership earned a jaw-dropping $1.96 million, 164% more than the industry’s average between 2015 and 2019
(see Chart II), and remarkably more than any prior year’s earnings pre-COVID. Even with the removal of the PPP
funds received in 2021, most dealerships are achieving profitability levels several times higher than historical
averages.
Chart II | Average Dealership Pre-Tax Profit, First Half 2015-2021, $ in 1,000s
$1,961
$200
+164%
2015-2019 Average: Dealership earnings in
$742K
the first half of 2021 are
164% higher than the pre-
$790 $768 $737 COVID industry average
$704 $714 $1,761
$558 (2015 – 2019). Even without
PPP funds factored in,
dealership earnings remain
historically high.
2015 2016 2017 2018 2019 2020 2021
Pre-Tax Profit PPP Estimate
Source: NADA Industry Analysis
Professional. Confidential. Proven. www.KerriganAdvisors.com
The Blue Sky Report
2
Second Quarter 2021
One of the primary drivers of auto retail’s stellar performance in 2021 is the limited supply of vehicles resulting
from the semiconductor chip shortage. The resurgence of COVID cases is currently exacerbating this setback,
causing cascading disruptions throughout the entire auto industry’s supply chain. Through June, the estimated
days supply of new vehicles reached a record low of 29 (see Chart III). The global shortage of semiconductors may
cut worldwide auto production by as much as 7.1 million vehicles in 2021, a 9.2% decline from pre-pandemic levels.
Chart III | Estimated Days Supply of New Vehicles at End of Each Month
80
70
70
Supply chain issues sent
60 -58.5 days supply of new vehicles
%
plummeting 58.5% to a record
50 low of 29 days in the first half of
2021. With a resurgence of COVID
40 cases worldwide, inventory is
29 expected to remain constrained
30
through 2022.
20
Jan-21 Feb-21 Ma r-21 Apr-21 Ma y-21 Jun-21
Source: Cox Automotive
This limited vehicle supply is intersecting with increasing consumer demand. As the economy rebounds,
consumers are tapping into quarantine savings and government stimulus to purchase new and used vehicles.
Record low borrowing costs are driving down car payments, making consumers less sensitive to today’s soaring
vehicle prices, particularly as vehicle scarcity instigates a buying frenzy for high demand models. Many consumers
also have a growing appreciation for the safety and importance of personal mobility (versus public transportation
and ridesharing), spurring a notable preference for spacious and expensive SUVs, CUVs and trucks.
Limited vehicle supply, coupled with strong buyer demand, is resulting in record prices for both new and used
vehicles (see Chart IV). New and used vehicle prices are up 10.6% and 29.6%, respectively since January 2020,
the largest rise in an 18-month period.
Chart IV | Change in Average New and Used Vehicle Purchase Price Since January 2020
35.0%
29.6%
30.0%
25.0%
20.0%
Inventory shortages and
15.0% 10.6% consumer demand sent new and
10.0% used vehicle prices skyrocketing,
5.0% up 10.6% and 29.6% respectively
since January 2020.
0.0%
-5.0%
20
20
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21
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M 0
Se 0
20
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Ju 0
Ju 1
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b-
ov
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ay
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ar
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Ju
Ap
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New Cars Used Cars
Source: Edmunds.com, Wall Street Journal
“We expect the current environment of demand exceeding supply to continue into 2022.”
Mike Jackson, CEO, AutoNation
Second Quarter 2021 Earnings Call
Professional. Confidential. Proven. www.KerriganAdvisors.com
The Blue Sky Report
3
Second Quarter 2021
This increase in vehicle prices is also leading to record gross profits per vehicle (see Chart V). Year to date
through June, average new vehicle gross profits per vehicle retailed more than doubled compared to 2019 pre-
pandemic levels, while used vehicle gross profit per vehicle rose an impressive 79%.
Chart V | Average Dealership Gross Profits per New & Used Vehicle Retailed Excluding F&I
$2,358
$1,919
$1,593
$1,315 Gross profits continued to soar,
$1,158
with retail gross PNVR more
$809 than doubling and retail gross
PUVR up 79% versus 2019’s
pre-pandemic levels.
2019 2020 First Half 2021
GPNVR GPUVR
Source: NADA Industry Analysis
With no end in sight to the industry’s supply constraints, higher gross profits are expected to be a fixture of the
industry into next year and potentially even longer. More and more OEMs are announcing plans to reduce their
days supply of inventory, even after chip availability rebounds. Notably, OEMs have recently experienced the
economic benefit of undersupplying the market, including lower incentive spending and higher corporate profits.
OEMs are not alone in their desire to operate with leaner inventories. Dealers today are witnessing the economic
advantages of a more productive and efficient business model, including a tremendous rise in revenue per
employee. As a result, dealers are achieving lower SG&A costs as a percentage of gross profit (see Chart VI)
and discovering fewer employees can produce higher profits when they are more productive. Much of these
productivity gains are expected to last long after inventories rebound.
Chart VI | SG&A as a Percentage of Gross Profit (Average Private* vs. Average Public)
76.0% 76.2% 75.9% 75.4%
74.6% 74.7%
74.7% 70.6%
73.0% 73.1% 73.6%
72.4% 72.7%
Higher productivity and staffing
69.3% efficiency have driven SG&A
62.7%
costs down to historically low
levels as a percentage of gross
61.9%
profit for both private and
public dealership groups.
2014 2015 2016 2017 2018 2019 2020 First Half
2021
Average Private* Average Public
Source: SEC Filings, NADA Industry Analysis, Kerrigan Advisors Analysis
* SG&A expenses for the average private dealership is adjusted to addback owners salary and gross profit is adjusted to include a portion of other income.
“A material part of the [earnings] improvement is due to productivity gains, which will largely be a
permanent benefit.”
Daryl Kenningham, President, US Operations, Group 1 Automotive
Second Quarter 2021 Earnings Call
Professional. Confidential. Proven. www.KerriganAdvisors.com
The Blue Sky Report
4
Second Quarter 2021
When inventory levels rebound, most dealers are committed to retaining productivity gains, particularly as
the industry transitions towards a digital advertising and retailing model (see Chart VII). As OEMs work to
achieve their electrification goals, the auto retailing experience will increasingly move from the showroom
to the living room, with consumers completing more of their car purchases online. The benefits of digital
advertising are already being felt, as advertising spending per vehicle continues to decline, while sales
volume rises (see Chart VIII).
Chart VII | Dealership Advertising Expenditures Traditional Versus Digital Share
72%
61%
-46% Spending on traditional and digital
+118% advertising has flipped since 2015,
39%
with the more effective digital
28%
advertising increasing 118% to
61% of advertising spending, while
traditional advertising dropped to
just 39% of the advertising budget.
Traditional Digital
2015 2020
Source: NADA Industry Analysis
“The pandemic has also been an inflection point towards digitalization.”
Mike Jackson, CEO, AutoNation
Second Quarter 2021 Earnings Call
Chart VIII | Average Dealership Revenue ($ in M) vs. Advertising Expense per New Vehicle Retailed (PNVR)
$80M $700
$70M
$650
$60M
Avertising PNVR
$600
Total Revenue
$50M
The cost benefit of a shift to digital
$40M $550 advertising is reflected in a 15.9%
decline in advertising spending
$30M
$500 per new vehicle retailed, relative
$20M to an 11.6% increase in total sales
$450 since 2019.
$10M
$0M $400
2014 2015 2016 2017 2018 2019 2020 TTM Ju n-
2021
Total Revenue Avertising PNVR
Source: NADA Industry Analysis
“We’re spending a lot less on advertising, and it’s even more effective.”
Heath Byrd, CFO, Sonic Automotive
Second Quarter 2021 Earnings Call
Professional. Confidential. Proven. www.KerriganAdvisors.com
The Blue Sky Report
5
Second Quarter 2021
Given the industry’s incredible profit performance over the last 12 months and positive outlook for 2022 and
beyond, Kerrigan Advisors finds most dealers are buyers, not sellers, and few are willing to accept the status
quo. Today’s dealers, both private and public, want to grow and have tremendous access to capital to do so, a
trend discussed further in this report (see Second Quarter 2021 Buy/Sell Trends section of this report on page
15). Few alternative investments provide the risk adjusted returns available from dealership acquisitions. Thus,
for most dealers the best allocation of their capital is auto retail.
The public dealer groups are also benefiting from a continued rise in their stock price, as Wall Street investors
experience outsized returns from their investments in auto retail. Since 2009, the Kerrigan Index has risen
1038% and since the 2020 lows is up an impressive 286% (see Chart IX). Though the industry is likely in a
state of change over the next decade, many believe the largest retailers will greatly benefit from this period
of transformation. The publics’ financial performance over the last twelve months (see Chart X) demonstrates
their incredible opportunity to dramatically increase their bottom line both through accretive acquisitions and
improved profitability.
Chart IX | The Kerrigan Index™ vs. S&P 500 (Rebased to 100 at Jan. 1, 2000)
THE
KERRIGAN INDEX TM
1,400
1,200
1,000
800 The Kerrigan Index continues to
600
outperform S&P 500—up 1038%
since 2009, outperforming the S&P
400 500 by 179%. Since the 2020 lows,
200 the Kerrigan Index has risen 286%.
0
2009 2010 2011 2012 2013 2014 2015 2016 2017 2018 2019 2020 2021
The Kerrigan Index™ S&P 500 (rebased)
Source: Yahoo Finance, Microsoft Finance, Kerrigan Advisors’ Analysis
Methodology: The Kerrigan Index™ is composed of the seven largest publicly traded auto retail companies with operations focused on the US market,
including CarMax, AutoNation, Penske Automotive Group, Lithia Motors, Asbury Automotive Group, Group 1 Automotive and Sonic Automotive.
The Kerrigan Index™ is weighted by the market capitalization of each company and benchmarked at 100 on 1/3/2000.
Chart X | Public Dealer Groups’ Net Income, $ in Millions
$4,500 $3,973
$4,000
$3,500
$3,000
The publics collectively increased
$2,500
$1,887 net income by 139% on a trailing-
$2,000 $1,738
$1,509 $1,659
$1,302 $1,381 twelve-months basis, relative
$1,500 $1,142
to 2019’s pre-COVID levels,
$1,000
demonstrating the tremendous
$500
earnings growth potential of the
$0
industry’s top consolidators.
($500)
2014 2015 2016 2017 2018 2019 2020 TTM Jun-
2021
AutoNation Penske Group 1 Asbury Sonic Lithia
Source: SEC Filings
Professional. Confidential. Proven. www.KerriganAdvisors.com
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6
Second Quarter 2021
With more buyers seeking acquisitions from a limited supply of sellers, the rising tide of industry performance
is lifting most boats, resulting in record valuations for many franchises (see Chart XI). Including real estate, the
average dealership’s enterprise value is approaching $21M, a 19% percent increase over 2019. Like the new
vehicle market, demand for dealerships is far exceeding supply, creating a seller’s market for most franchises,
particularly those in high growth markets like Florida and Texas.
Chart XI | Kerrigan Advisors’ Estimated Average Dealership Blue Sky and Real Estate Value, $ in Millions
%
+19.2 $20.8
$19.2
$16.9 $17.0 $17.4 $17.5
$16.4
$9.1
$7.7
$6.6 $6.3 $6.1 $6.4 Demand for auto dealerships
$6.8
exceeds supply, driving valuations
to record levels: up 19% for the
average dealership since 2019.
$10.7 $11.3 $11.1 $11.5 $11.8
$9.6 $10.3
2015 2016 2017 2018 2019 2020 Q2 2021
Real Estate Value Blue Sky Value
Source: NADA Industry Analysis, Kerrigan Advisors’ Analysis
With this backdrop, Kerrigan Advisors has identified the following three important trends we expect to
meaningfully impact the buy/sell market for the remainder of 2021 and into 2022.
Ø Buyer pool of existing dealers expands as cash accounts rise and access to debt grows
Ø Sellers become less flexible on valuation as their profits soar
Ø OEMs are increasingly overwhelmed by 2021’s buy/sell volume and less flexible on framework terms
The Blue Sky Report® is informed by Kerrigan Advisors’ nationwide experience enhancing the value of the
industry’s leading dealers through the lifecycle of growing, operating, and selling their businesses. Since our
founding, Kerrigan Advisors has had the honor of representing the industry’s largest transactions, including
more Top 150 Dealership Groups than any other firm in the industry.
Our team oversees and manages our client engagements from beginning through a successful outcome. In our
view, dealerships are far too valuable to be advised any other way. We do not take listings, rather we develop a
customized sales approach for each client to achieve their transaction and financial goals. Our professional sale
process has led to the highest sale price per transaction of any firm over the last five years.
We hope you find the information presented in this quarter’s report helpful to your business. We look forward to
answering any questions you may have regarding The Blue Sky Report, The Kerrigan Index or Kerrigan Advisors’
consulting services.
To have a confidential conversation with our managing directors,
please contact us directly. We look forward to connecting with you.
Erin Kerrigan | erin@kerriganadvisors.com or (949) 439-6768
Ryan Kerrigan | ryan@kerriganadvisors.com or (949) 728-8849
Professional. Confidential. Proven. www.KerriganAdvisors.com
The Blue Sky Report
7
Second Quarter 2021
Total Acquisition Activity
There were 144 dealership buy/sell transactions in the first half of 2021, a 27.4% increase over the first half of 2020 and a
record number for the period (see Chart XII). The high level of buy/sell activity in the first half reflects 2021’s robust buy/sell
market and the likelihood that this year will surpass last year’s peak. As noted in Kerrigan Advisors’ first quarter report, our
firm expects transaction activity to rise dramatically in the second half of the year as more sellers seek to complete their
sale before year-end to lock in a lower tax rate and avoid a potential tax increase in 2022.
Chart XII | Total Number of Completed Dealership Transactions, First Half
144
4%
127
7.
114 113
+2
106 101 103 Transactions rose 27.4%, with
144 completed in first half of 2021
vs 2020, on track for another
historic year of buy/sell activity.
The risk of an increase in taxes in
2022 continues to be a driver for
transaction activity in 2021.
2015 2016 2017 2018 2019 2020 2021
Source: The Banks Report, Automotive News, Kerrigan Advisors’ Research
Note: A transaction often includes multiple dealerships and is defined as a sale of a dealership or dealership group by one seller to one buyer.
The number of multi-dealership transactions in the first half of 2021 increased an incredible 96% as compared to 2020,
hitting a new record. There were 51 multi-dealership transactions in the first half of 2021, representing 35.4% of the
buy/sell market (see Chart XIII), the highest percentage ever recorded during the first half of the year. Kerrigan Advisors
expects the buy/sell market share of multi-dealership transactions to remain high for the remainder of 2021, as the pool
of buyers able to complete large transactions continues to grow in large part due to increasing access to capital and
financing (see Second Quarter 2021 Buy/Sell Trends section of this report on page 15).
Chart XIII | Total Number of Multi-Dealership Transactions vs. Percentage of Total Dealership Transactions, First Half
6 0
51
5 0
2015-2019 First Half Average: +93%
26 Multi-Dealership Transactions
4 0
33
31
35.4% Multi-dealership transactions are
26
3 0
22 29.2% 23 28.9% 23 trending dramatically upward,
2 0
22.8% 22.3% 23.0% rising 93% as compared to the
pre-pandemic average (2015-
17.3%
1 0
2019) to 35.4% of the market.
-
2015 2016 2017 2018 2019 2020 2021
Multi-Dealership Transactions % of Total
Source: The Banks Report, Automotive News, Kerrigan Advisors’ Research
Professional. Confidential. Proven. www.KerriganAdvisors.com
The Blue Sky Report
8
Second Quarter 2021
Among the franchises being acquired, import non-luxury franchises increased their market share in the first half of 2021 to
41% of the buy/sell market, the highest level since 2015 (see Chart XIV). Kerrigan Advisors expects this trend to continue
into 2022. During peak periods of profitably, we find buyer demand for import non-luxury franchises rises, as these
franchises tend to outperform the market. Also, some of these franchises were better positioned with greater inventory
availability and fewer supply constraints. It should be noted that import franchises represented 58% of the buy/sell market
(41% for non-luxury and 17% for luxury) in the first half of 2021, a disproportionate representation relative to their share
of total franchises, currently just 34%. By contrast, domestic franchises, which were more affected by the chip shortage,
were underrepresented in the buy/sell market at 42% relative to their 66% market share of US franchises.
Chart XIV | Buy/Sell Market Share by Type of Franchise
37% 31% 31% 30%
38% 41%
47%
14% 13% 20%
19%
Import franchises represent a
18% 17% disproportionate share of the buy/sell
22%
market at a combined 58% (41% non-
55% 56% 50% luxury and 17% luxury), relative to their
44% 44% 42%
31% franchise market share of just 34%.
2015 2016 2017 2018 2019 2020 First Half
2021
Domestic Import Luxury Import Non-Luxury
Source: The Banks Report, Automotive News, Kerrigan Advisors’ Research
In the first half of 2021, Toyota represented over 10% of the franchise buy/sells, in line with Ford’s, CDJR’s and Chevrolet’s
buy/sell market share (see Chart XV). This is impressive when considering that Toyota has only 1,238 franchises in the
US, as compared to Ford’s 3,006, CDJR’s 2,461, and Chevrolet’s 2,924. Kerrigan Advisors continues to see tremendous
demand for Toyota franchises due to the OEM’s partnership business model with its dealers. Buyers are more comfortable
investing in a franchise that considers its dealer network a key ingredient of its success, particularly in an environment
where OEMs are flirting with the idea of selling direct to consumers and changing the dealership business model with the
introduction of electric vehicles.
Chart XV | Buy/Sell Market Share by Franchise, First Half 2021
Ford
Infiniti JLR PorscheAcuraOthers 11.4%
1.0% 1.0% 1.0% 0.7% 5.5%
Volvo
1.3%
Mazda
1.3% Toyota
BMW 10.4%
1.3%
Lincoln
2.0%
Mercedes
2.3%
Lexus
2.3% High demand for Toyota franchises
Honda
Chevrolet
continues. Although Toyota has less
2.3%
10.1% than half as many franchises as Ford,
Volkswagen
2.6% CDJR and Chevrolet, its percentage of
Cadillac
the buy/sell market is on par with these
2.6% domestic OEMs.
Audi
2.6%
Nissan CDJR
3.9% 10.1%
Subaru
5.2%
Kia Buick GMC
5.2% 8.1%
Hyundai
5.9%
Source: The Banks Report, Automotive News, Kerrigan Advisors’ Research
Professional. Confidential. Proven. www.KerriganAdvisors.comThe Blue Sky Report
9
Second Quarter 2021
US Public Acquisition Activity
US public acquisition spending of $2.15 billion in just the first half of 2021 nearly surpassed 2020’s full year of spending.
On a trailing twelve-month basis, the publics spent a remarkable $4.45 billion on US dealership acquisitions, the most
ever spent in a 12-month period in the history of the industry (see Chart XVI).
Chart XVI | US Public Dealership Groups’ US Dealership Acquisition Spending, $ in Millions
$4,451
$1,716 First Half
2021:
$2,149
$2,457
$433 The publics continued to
allocate capital to acquisitions,
$1,449 $894
spending a record $4.45 billion
$832 $795 $742 over the last four quarters.
$661 $671
$1,408
2014 2015 2016 2017 2018 2019 2020 TTM Jun-
2021
Q3 2020 Q4 2020 Q1 2021 Q2 2021
Source: SEC Filings for Asbury, AutoNation, Group 1, Lithia, Penske & Sonic
“There are a lot of deals out there right now. And so, we’re strategically buying deals that fit our
footprint or markets that we’re going into.”
Jeff Dyke, President, Sonic Automotive
Second Quarter 2021 Earnings Call
With the publics’ stock prices on the rise, more acquisitions are accretive to these companies’ earnings. As noted in
our first quarter 2021 report, Kerrigan Advisors finds Wall Street investors are rewarding the most acquisitive publics
with higher valuations as a percentage of revenue, an increasingly common valuation metric in a consolidating industry
with tremendous digital upside. Notably, Lithia, which acquired 58 franchises in the first half of 2021, reported on its
second quarter earnings call that the company is pricing dealership acquisitions between 15% and 30% of revenue on an
enterprise value basis, including real estate where applicable. At this percentage of revenue, Lithia’s acquisitions are very
accretive to earnings given the company’s stock price is currently valued at 64% of revenue (see Chart XVII).
Chart XVII | Public Dealership Groups’ Market Capitalization as of July 30, 2021 as a Percentage of TTM Revenue
64%
45% Acquisitions prove accretive to
publics’ earnings as investors
36% reward acquisitive publics with
29% higher valuations – Lithia’s
25% market capitalization is
20%
valued at a remarkable 64% of
revenue.
Sonic Group 1 Penske AutoNation Asbury Lithia
Source: Microsoft Finance, SEC Filings for Asbury, AutoNation, Group 1, Lithia, Penske & Sonic
Professional. Confidential. Proven. www.KerriganAdvisors.comThe Blue Sky Report
10
Second Quarter 2021
“We think that we’ve built what we need to build to constructively and meaningfully aggregate this
unconsolidated space.”
Bryan DeBoer, President & CEO, Lithia & Driveway
Second Quarter 2021 Earnings Call
Since Wall Street is paying a price premium for companies that grow through acquisition, it is not surprising to see more
publics enter the acquisition market in 2021. Whereas last year only Lithia and Asbury acquired US dealerships, year to
date Penske, Group 1 and Sonic have also made acquisitions totaling five dealerships, leading to 61 public dealership
acquisitions in the first half of the year.
Since 2019, the publics have notably increased their dealership count by 48, becoming net buyers instead of net sellers
of dealerships (see Chart XVIII). As the largest companies in auto retail, the publics are once again leading industry
consolidation, after years of largely sitting on the sidelines (except for Lithia).
Chart XVIII | US Public Dealership Groups’ Domestic Franchise Acquisitions vs. Divestitures
61
43
40
Since 2019, the publics have reversed
23 course becoming net buyers, rather
19
than sellers of dealerships.
12
Acquisitions Divestitures
2019 2020 First Half 2021
Source: SEC Filings, Automotive News, Kerrigan Advisors’ Research
KERRIGAN ADVISORS’ RECENT TRANSACTION ANNOUNCEMENT
“The success we’ve had over the years
is a direct reflection of our tireless
efforts to keep the customer experience
Represented on the sale of
front and center—no matter what
challenges came our way. Kerrigan
Advisors brought that same sense of
commitment and dedication to the way
they represented my dealerships. As
GRAND JUNCTION, CO a result, they were able to reflect to
to the marketplace an accurate picture of
the dealerships’ value, both in terms
of the quality of the assets and the
importance of our people.”
July 2021
Securities offered through Bridge Capital Associates, Inc., Member FINRA, SIPC
Ron Bubar, Owner of Grand Junction
Subaru & Volkswagen
Professional. Confidential. Proven. www.KerriganAdvisors.comThe Blue Sky Report
11
Second Quarter 2021
Through the first half of 2021, the publics increased their allocation to US dealership acquisitions to 53%, from 20% in the
first half of 2020 (see Chart XIX). While acquisition spending increased, these companies still have options for their capital.
If they do not see acquisitions that make economic sense for their shareholders, they can reinvest their cash flow into their
own stock, which they increasingly did in the first half of 2021. Spending on stock buybacks increased 494% in the first
half of 2021, amounting to $1.1 billion. While this level of spending is about half of their dealership acquisition spending
during the period, it is still a significant amount of capital and a testament to the publics’ belief in the value of their own
companies and auto retail’s profitable future.
Chart XIX | US Public Dealership Groups’ Capital Allocation, First Half 2020 vs. 2021, $ in Millions
First Half 2020 First Half 2021
International &
Other Acquisitions
US Dealership $167
Stock Buyback 4% Stock Buyback
Acquisitions
$191 $1,136
$155
24%
20% 28%
Stock buyback spending
increased 494% in 2021,
demonstrating the publics’
Dividends
Dividends confidence in their valuations
$62
8% US Dealership $108 and the future of auto retail.
Acquisitions 2%
$2,149
53% Capex
Capex $521
$373 13%
48%
Source: SEC Filings for Asbury, AutoNation, Group 1, Lithia, Penske & Sonic
“I bought 9% of AutoNation rather than doing a lot of acquisitions that I thought were overpriced.”
Mike Jackson, CEO, AutoNation
Second Quarter 2021 Earnings Call
Note: LMP Automotive is the newest public company in our industry. As the company continues to grow its platform,
Kerrigan Advisors will monitor the company’s performance and may consider including a review of its acquisitions in this
section of our report and in the Kerrigan Index if it approaches the size of the legacy publics in the industry.
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12
Second Quarter 2021
Private Acquisition Activity
Private buyers continue to dominate industry consolidation, albeit less than they did in 2020 given the publics renewed
commitment to acquisitions. Private buyers acquired 80% of the franchises sold in the first half of 2021 (see Chart XX),
relative to 91% in 2020. Interestingly, the top 144 private dealers represented only 6% of the buy/sell market in the first
half. By contrast, in 2020, this cohort of the largest private groups completed 20% of the industry’s buy/sells. Kerrigan
Advisors believes the disparity in the largest private group’s buy/sell market share between 2021 and 2020 reflects the
growing pool of smaller buyers entering the buy/sell market, some for the first time, creating increased competition for
all acquisitions (see Second Quarter 2021 Buy/Sell Trends section of this report on page 15 for additional discussion
regarding the growing pool of buyers).
Chart XX | Percentage of Franchise Acquisitions by Buyer Type, First Half 2021
Public
61 Franchises
Private buyers continue to
20%
dominate the buy/sell market, a
Private reflection of the fragmentation of
248 Franchises auto retail and the opportunity for
80% further industry consolidation.
6%
Top 144 Private
Dealership Groups
Source: The Banks Report, Automotive News, Kerrigan Advisors’ Research
Note: This chart reflects franchises, not dealerships. CDJR is counted as one franchise for this analysis.
“The franchise business is still extremely fragmented in this country. And so there’s still tremendous
opportunity for growth.”
David Bruton Smith, CEO, Sonic Automotive
Second Quarter 2021 Earnings Call
Interestingly, the industry’s financial success has also made it even harder for outside capital to find attractive dealership
investments given tremendous competition from strategic buyers, both large and small. Existing dealers today have
little need for an outside capital partner to fund growth given their access to capital from operations and existing lender
relationships. As a result, Kerrigan Advisors expects outside capital will find the next 12 months to be a challenging
environment in which to invest in auto dealerships.
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Second Quarter 2021
Dealership Real Estate
Dealership real estate values rose again in the first quarter of 2021 (see Chart XXI), supported by record low mortgage
rates and high loan-to-value financing. The credit quality of the auto retail industry and its proven success through the
pandemic has increased investor interest in dealership real estate assets, resulting in a decline in industry cap rates. In
the first half of 2021, Kerrigan Advisors saw industry cap rates dip below 7% and in certain cases approach 6% for higher
quality tenants.
Chart XXI | Kerrigan Advisors’ Estimated Average Dealership Real Estate Value ($ in Millions) vs. Annual Change (%)
$11.8
$11.3 $11.5
$11.1
$10.7
$10.3
$9.6
Dealership real estate values
7.3% continue to rise, up to an average
4.3% 4.9%
3.7% 3.7% of $11.8 million in the second
2.4%
quarter of 2021, driven by low
-1.7% mortgage rates and high loan-to-
value financing.
2015 2016 2017 2018 2019 2020 Q2 2021
Real Estate Value ($ in M) Annual Change (%)
Source: NADA Industry Analysis, Kerrigan Advisors’ Analysis
Not surprisingly, higher real estate values and image upgrade expenses are leading to rising rents, despite declining cap
rates. The average dealership rent expense reached a record $823K on a trailing twelve-month basis (see Chart XXII)
in June 2021. While higher rent payments add risk to the dealership business model, the industry’s rising gross profit
levels resulted in an overall decline in the rent-to-gross profit margin to 9.3%, the lowest level since 2015, demonstrating
dealerships’ ability to absorb the increasing fixed expense of facilities.
Chart XXII | Average Dealership Rent Expense ($ in 1,000s) vs. Rent Expense as a Percentage of Gross Profit (%)
$804 $823
$788 $775
$751
$724
$675
11.5% Higher real estate values and
11.2% image upgrades led to record
11.0% 11.0%
10.7% average rent expense of $823K for
10.3%
the trailing twelve months ending
9.3%
June 2021; however, rising gross
profits led to a reduction of rent
as a percentage of gross to just
9.3%, the lowest level since 2015.
2015 2016 2017 2018 2019 2020 TTM
Jun-2021
Rent Expense ($ in 1,000s) Rent-to-Gross Profit (%)
Source: NADA Industry Analysis
As gross profit per new vehicle retailed rises far above rent per new vehicle retailed (see Chart XXIII on the following
page), OEMs are demanding more facility upgrades as part of buy/sell transactions. Kerrigan Advisors expects auto
retailers’ remarkable profit performance in 2021 will result in an increase in facility investments in 2022. These real
estate investments could be misplaced as the industry looks to right size property to reflect a lower days supply of
inventory in the future.
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Second Quarter 2021
Chart XXIII | Average Dealership Rent per New Vehicle Retailed (PNVR) vs. Gross Profit PNVR, Excluding F&I
$2,000 $1,919
$1,750
$1,500 $1,023
PVR
$1,250
Gross profit per new vehicle
$1,000 retailed (excluding F&I) rose
to more than double rent per
$750 $896
new vehicle retailed—a $1,023
$500 difference in the first half of
2021.
$250
$0
2015 2016 2017 2018 2019 2020 First Half
2021
Rent PNVR Gross PNVR (excl. F&I)
Source: NADA Industry Analysis
Recently, Kerrigan Advisors has been unimpressed by many OEMs management of image requirements for their dealer
networks. For most OEMs, their dealers’ largest single investment, real estate, is not even reaching the white board as
the OEMs plans for electrification and digital retailing. Perhaps the best example of this challenge is Jaguar, which put
its facility plans on hold after announcing a move to an all-electric fleet despite a number of dealers having recently
completed, or in the midst of completing, one of the more expensive image facilities in the industry. If OEMs do not adjust
dealership real estate requirements to reflect a changing auto retail environment, Kerrigan Advisors believes real estate
investments will become one of the more divisive issues between OEMs and dealers during the transition to an electrified
product line and could ultimately impact blue sky values and multiples.
A Leading Sell-Side Advisor and
Thought Partner to Auto Dealers
At Kerrigan Advisors, our firm’s success is attributed
to our team’s laser-focus on fulfilling each client’s
personal and financial goals.
SELL-SIDE CAPITAL-RAISING CONSULTING
SERVICES SERVICES SERVICES
© 2021 Kerrigan Advisors. All rights reserved.
Securities offered through Bridge Capital Associates, Inc., Member FINRA, SIPC
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Second Quarter 2021
SECOND QUARTER 2021 BUY/SELL TRENDS
Kerrigan Advisors’ successful sell-side advisory work across the US as well as our experience consulting with growing
dealership groups, gives our firm a unique perspective on the trends affecting today’s auto retail buy/sell market. For
the second quarter of 2021, we identified the following three trends which we expect to meaningfully shape the buy/sell
market for the remainder of 2021 and into 2022.
Ø Buyer pool of existing dealers expands as cash accounts rise and access to debt grows
Ø Sellers become less flexible on valuation as their profits soar
Ø OEMs are increasingly overwhelmed by 2021’s buy/sell volume and less flexible on framework terms
Buyer Pool of Existing Dealers Expands as Cash Accounts Rise and Access to Debt Grows
Businesses across the country, particularly auto dealerships, are paying down debts with their tremendous cash flow
from operations. Undrawn lending commitments such as floorplan are currently at record levels. J.P. Morgan and Bank of
America, two of the largest banks in the US, are approaching a collective trillion dollars of capital availability for business
borrowing (see Chart XXIV).
Chart XXIV | Undrawn Lending Commitments (J.P. Morgan & Bank of America), $ in Billions
$550
$500
J.P. Morgan and Bank of America
$450
have nearly a trillion dollars in
$400 undrawn lending commitments
combined, a historic level of
$350 capital availability.
$300
2015
2015
2015
2015
2016
2016
2016
2016
2017
2017
2017
2017
2018
2018
2018
2018
2019
2019
2019
2019
2020
2020
2020
2020
2021
2021
Q1
Q2
Q3
Q4
Q1
Q2
Q3
Q4
Q1
Q2
Q3
Q4
Q1
Q2
Q3
Q4
Q1
Q2
Q3
Q4
Q1
Q2
Q3
Q4
Q1
Q2
J.P. Morgan Bank of America
Source: Wall Street Journal, J.P. Morgan, Bank of America
In this environment, the average dealer’s debt to equity ratio is approaching just 1.06, a significant decline from 2019’s
ratio of 1.37 (see Chart XXV). Today, dealers not only have a historic amount of cash in their bank accounts, they also have
increasing access to debt. Many find themselves in the strongest financial position they have been in their careers and
are better able to consider meaningful expansion and large multi-dealership acquisitions.
Chart XXV | Average Dealership Debt to Equity Ratio
1.37
1.26
6.2% 1.06 The average dealership’s debt
to equity ratio declined 15.9%
-8.0% in the last six months to 1.06 in
June 2021, reflecting record cash
-15.9%
reserves and untapped financing.
2019 2020 Jun-21
Net Debt to Equity Annual Change (%)
Source: NADA Industry Analysis, Kerrigan Advisors’ Analysis
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Second Quarter 2021
“We are at very low leverage levels. So, we have tremendous capacity to be opportunistic.”
Joe Lower, CFO, AutoNation
Second Quarter 2021 Earnings Call
As a result, Kerrigan Advisors sees a growing pool of dealers who are anxious to put their capital to work and acquire
multiple dealerships and dealership groups. While there have always been buyers for dominant dealerships in growing
markets, the buyer pool for smaller and medium sized dealership groups was often quite thin, particularly if a major
consolidator was uninterested. Today, the pool of buyers for most dealerships is abundant, as more dealers are financially
confident in deploying considerable amounts of capital towards major expansion.
With the drumbeat of consolidation getting ever louder, dealers increasingly believe size and scale will determine their
future success. Many are focused on expanding their regional market share and diversifying their franchise mix. Few
believe the status quo will suffice to succeed in a changing auto retail environment. The good news today is dealers have
the capital to execute on their growth plans.
Sellers Become Less Flexible on Valuation as Profits Soar
Most dealers earned more in just the first six months of 2021 than they have in any previous 12-month period prior to
COVID-19 (see Chart XXVI). Many have changed their business’ operations and are discovering the tremendous profits
they can earn when their people and assets are more productive and their operations more efficient. Kerrigan Advisors
finds most dealers are committed to finding a way to retain higher grosses and lower expenses going forward. Few expect
to return to the low margin business model of the pre-pandemic era.
Chart XXVI | Average Dealership Annual Pre-Tax Profit ($ in Millions) vs. Net to Sales (%)
$3.51
+147
% More efficient business
2014-2019 Average:
operations and higher gross
$1.42M $2.11 profits contributed to increased
$1.96
profits in the first half of 2021—
$1.50 $1.47 $1.42 an average of $1.96 million,
$1.38 $1.39 $1.36
5.4% 5.1% more than any pre-pandemic
3.6%
12-month period. This led to
2.6% 2.7% 2.5% 2.3% 2.2% 2.3% an incredible trailing-twelve-
month profit of $3.51 million,
147% more than the pre-COVID
2014 2015 2016 2017 2018 2019 2020 First Half TTM Jun-
2021 2021
average (2014-2019).
Pre-Tax Profit ($ in M) Net to Sales (%)
Source: NADA Industry Analysis
With this in mind, many sellers are increasing their pricing expectations for their businesses and becoming less flexible
with regard to valuation. As the industry approaches the completion of its second year of record earnings, fewer sellers
are willing to consider a valuation based on pre-pandemic earnings. This is particularly the case as more OEMs expect
inventories to remain constrained through 2022 and consumer demand to stay high, resulting in a continuation of dealers’
vehicle pricing power.
Sellers are also increasingly aware that their current return on equity (“ROE”), which is estimated at over 57% as of the end
of June 2021, will be very hard to replicate in today’s low yield investment environment (see Chart XXVII on the following
page). Few investments provide the level of ROE afforded dealers in 2021, particularly on a risk adjusted basis.
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Second Quarter 2021
Chart XXVII | Historical Investor Returns
57.6%
Dealership ROE in 2021 is an
average 57.6%, a remarkable
return compared to alternative
13.6%
10.1%
investments in today’s low yield
9.4%
investment environment.
1.4% 2.6%
US 10-Year Moody's AAA MSCI Real Bloomberg US S&P 500 10- Average
Treasury Corporate Estate 10-Year Corporate High Year Average Dealership
Aug-21 Bonds '11-'21 Yield Bond '10-'20 Return on
Aug-21 Index Equity
Jul-21 Jun-21
Source: NADA, Kerrigan Advisors’ Analysis, Bloomberg, Goldman Sachs, MSCI, Moody’s, US Federal Reserve Bank, CNBC
As the months of record earnings persist, yesterday’s valuations seem ludicrous relative to today’s earnings. This pricing
challenge may become even more pronounced if 2021’s earnings continue into 2022 and pre-pandemic earnings seem
less relevant as time passes. If fewer buyers agree with sellers’ profit projections, sellers’ valuation expectations could
temper buy/sell activity in 2022.
OEMs are Increasingly Overwhelmed by 2021’s Buy/Sell Volume and Less Flexible on Framework Terms
The volume of buy/sells has grown exponentially over the last 12 months and is projected to reach a new record in the
second half of the year as sellers aim to secure a lower tax rate on their sale proceeds. The unprecedented rise in buy/sell
activity is a shock to the OEM approval process. The volume is simply overwhelming their systems.
Not surprisingly, the OEM approval process is becoming less responsive and more bureaucratic, with certain OEMs
taking several weeks to send buyers applications and often many days to respond to buyer and seller correspondence. In
Kerrigan Advisors’ recent experience, General Motors has been the least responsive in processing their dealers’ buy/sells.
Kerrigan Advisors expects the challenges of OEM staffing on buy/sell approvals to become a crisis issue in the fourth
quarter, given the economic fallout of missing a 2021 close.
Kerrigan Advisors also finds OEMs are increasingly demanding framework agreement terms from large group buyers
that are outside the scope of prior requirements of a buy/sell approval. Emboldened by the level of buy/sell activity and
cautious about the future of their franchise system, certain OEMs are placing tremendous restrictions on consolidators as
part of the transaction approval process. In some cases, these restrictions jeopardize a transaction’s closing.
Kerrigan Advisors will continue to monitor the efficiency of each OEMs buy/sell approval process and may factor this
into our future blue sky multiples. As with any business, the more liquid the business, the more valuable. The lengthier a
buy/sell approval process becomes, the less liquid the franchise investment. The old adage in investment banking, “time
kills deals”, is still alive and well. OEMs that take too much time to approve their buy/sells and subject the process to
unnecessary red tape and restrictions will likely find a larger number of their buy/sells fall apart, ultimately leading to less
buyer demand and potentially lower blue sky multiples for their franchises.
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Second Quarter 2021
KERRIGAN ADVISORS’ BLUE SKY MULTIPLES
Kerrigan Advisors’ blue sky multiples and accompanying analysis outline the high, average and low blue sky multiples for
each franchise in the luxury and non-luxury segments. Most dealerships are valued based on their assets plus blue sky,
excluding working capital. Kerrigan Advisors’ blue sky multiples are typically applied to trailing twelve months adjusted
earnings before non-floorplan interest and taxes. Given the tremendous improvement in dealership profits since the
economic lockdown of 2020, our firm finds most buyers are applying blue sky multiples to an average of 2019’s
pre-pandemic profits and 2021’s trailing twelve month adjusted post-pandemic earnings. In so doing, buyers are
hedging their bets, giving equal weight to the potential for 2021’s profit levels to sustain for some period, while
considering the possibility of a return to pre-pandemic earnings in the future.
Kerrigan Advisors’ blue sky multiples are based on our view of franchise values in the current buy/sell market. Each
dealership has its own unique valuation drivers and significant analysis should be done to determine the market clearing
price for a dealership’s blue sky. Accurately adjusting earnings, for instance, is critical in determining blue sky value.
Kerrigan Advisors’ high, average and low multiples reflect the variability in dealership values, depending on specific
circumstances and situations. In our experience, the seven key factors that drive valuation of a specific franchise are:
(1) earnings growth expectations; (2) buyer demand; (3) real estate; (4) market vehicle preference; (5) franchise market
representation; (6) customer relations and (7) revenue mix. The combination of these seven factors determines the blue
sky multiple a buyer is ultimately willing to pay.
Higher Multiple
Low Rent/ Franchise Single-
High High High CSI High Level of
Image Highly Point
Growth Demand & SSI Fixed Ops
Compliant Suitable Market
Average 1 2 3 4 5 6 7 Adjusted
Blue Sky Earnings Buyer Real Market Market Customer Revenue Blue Sky
Multiple Growth Demand Estate Vehicle Repres- Relations Mix Multiple
Expectations Preference entation
High Rent/
Low/No Low Franchise Over- Low CSI Low Level
Building
Growth Demand Unsuitable Franchised & SSI of Fixed Ops
Project
Lower Multiple
Factor One: Earnings Growth Expectations
• Higher Growth = Higher Multiple: Underperforming dealerships, particularly those in high growth markets, often
command higher multiples. Buyers of these underperformers expect earnings to grow post-closing and are thus
willing to pay a higher multiple, knowing they will achieve a strong ROI.
• Lower Growth = Lower Multiple: Dealerships which are overperforming, either due to an aggressive operator or
unsustainable market dynamics usually command lower blue sky multiples.
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Second Quarter 2021
Factor Two: Buyer Demand
• Higher Demand = Higher Multiple: Certain markets are in higher demand than others. Dealerships in high population
growth, low tax, business friendly states, such as Texas and Florida, command multiples several times higher than
the published ranges herein. High buyer demand, with limited seller supply, drives up price and may be the biggest
determiner of blue sky value in 2021.
• Lower Demand = Lower Multiple: Less demand means less competition and lower blue sky multiples. As an example,
there are fewer buyers seeking dealerships in smaller/rural markets, resulting in lower multiples in those markets.
Factor Three: Real Estate
• Image Compliant Facilities & Low Rent = Higher Multiple: Image compliant dealerships with low rent command higher
multiples. These dealerships are highly attractive to buyers because they require no additional investment and have
an attractive rent factor, thus low fixed expenses and less risk. In general, if a dealership is image compliant and its
rent-to-gross profit is below market averages, it is considered to have low rent.
• Real Estate Investment Required and/or High Rent = Lower Multiple: Dealerships that require major real estate
investments or have high rent command lower multiples. Most buyers are not looking for real estate development
projects. When a dealership requires a significant real estate investment, both known and unknown costs are
anticipated. These costs result in increased future rent, which could reduce future earnings. As such, buyers often
price non-image compliant franchises or franchises with high rent at lower multiples to consider the risk to future
earnings and operation disruption during construction.
Factor Four: Market Vehicle Preference
• Highly Suitable Franchise for a Market = Higher Multiple: Franchises that are highly suitable for a market receive
higher multiples. For example, a domestic franchise located in a truck market, such as Colorado or Texas, is more
valuable than the average domestic franchise in the US, and thus will likely command a higher multiple. This is
because unit sales volume and dealership earnings in those markets are expected to be far above the average
domestic franchise.
• Unsuitable Franchise for a Market = Lower Multiple: Franchises that are unsuitable for a market receive lower multiples.
For example, a luxury franchise in a small city with few high-income wage earners will be much less valuable than a
luxury franchise located in a major metro.
Factor Five: Franchise Market Representation
• Single Point Market = Higher Multiple: A franchise with no like-franchise competition in its market will usually sell at
a higher multiple than a franchise which competes with one or more like-franchises. The exception to this rule is if
a buyer knows a new point will be added to a market. In that instance, the price premium would be reduced, as the
buyer would expect sales and margins to decline when a competitor enters the market.
• Over-Dealered Market = Lower Multiple: Markets with too many like-franchises command much lower multiples.
These franchises face higher competition and typically lower margins, thus lower profits.
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Second Quarter 2021
Factor Six: Customer Relations
• High CSI/Dealer Rating/Customer Retention = Higher Multiple: A dealership’s brand and reputation is playing an
increasingly important role in franchise value. Dealerships with high customer retention rates and exceptional customer
relations will command higher multiples, as the profits associated with those businesses are more sustainable.
Kerrigan Advisors believes a dealership’s social media brand will become increasingly important to franchise value
in the future.
• Low CSI/Dealer Rating/Customer Retention = Lower Multiple: Dealerships with poor online reputations, coupled with
low CSI and SSI, receive lower blue sky multiples. Buyers of these dealerships are concerned about the time and
capital required to change customer perceptions. Furthermore, low customer retention results in higher customer
acquisition costs and a less efficient business model. With social media’s growing commercial importance, poor
dealer ratings will also have an increasingly negative effect on franchise value.
Factor Seven: Revenue Mix
• High Share of Fixed Ops = Higher Multiple: Fixed operations is the highest margin, most consistent revenue stream
associated with the dealership business model. Dealerships with strong fixed operations trade at higher multiples
because their earnings are more predictable and less cyclical. These dealerships usually have higher UIO counts,
above average service retention, excellent CSI/SSI and high fixed absorption rates, resulting in a more attractive
business model that is less susceptible to economic cycles.
• Low Share of Fixed Ops = Lower Multiple: Dealerships with weak fixed operations trade at lower multiples. These
dealerships’ earnings are reliant on vehicle sales to achieve their profitability and thus more exposed to economic
cycles. They also tend to have lower UIO counts, weak service retention and low fixed absorption, thus riskier business
models.
Kerrigan Advisors’ blue sky multiples reflect a buyer’s required return on investment in exchange for the perceived risk
associated with a franchise’s future income stream. Franchises with higher operational risk command lower multiples,
while franchises with lower operational risk command higher multiples (see Chart XXVIII).
Chart XXVIII | Expected Unlevered Return on Investment Based on Blue Sky Multiple
33%
Expected Unlevered Return on Investment
25%
20%
17%
14%
13%
11%
10%
2.0x 3.0x 4.0x 5.0x 6.0x 7.0x 8.0x 9.0x
Blue Sky Multiple
Source: Kerrigan Advisors’ Analysis
Note: Analysis excludes real estate and assumes working capital and fixed assets collectively represent a single turn of earnings.
Analysis also assumes there is no change in dealership earnings post-transaction.
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Second Quarter 2021
Second Quarter 2021 Blue Sky Multiple Adjustments
Valuation of blue sky is a challenging exercise in 2021 for both buyers and sellers. Kerrigan Advisors finds most buyers are
unwilling to apply blue sky multiples to current earnings out of concern for mid-term and long-term earnings sustainability
and the risk of margins reverting to historical norms. Rather, buyers are applying blue sky multiples to their expectation for
future earnings, often averaging pre-pandemic and post-quarantine performance to estimate future normalized earnings
if/when inventory levels rebound.
By contrast, as discussed in the trends section of this report, many sellers are hesitant to sell their franchises based on a
valuation that considers pre-pandemic earnings. Most of these sellers are currently achieving record profits and see no
end to the industry’s improved profitability. Kerrigan Advisors cautions buyers who are overly conservative in their 2021
valuations as we expect prices to rise in 2022. When the industry moves further away from pre-pandemic periods, and if
it proves out the durability of the reengineered business model, dealerships that seem expensive this year may well have
an even higher purchase price in 2022.
One rising concern for some buyers and sellers is the dramatic announcements by many OEMs regarding the electrification
of their vehicle fleet. While electrification will certainly have an impact on the dealership business model of the future,
Kerrigan Advisors expects dealers will adjust successfully and ultimately find ways to increase, rather than decrease,
profitability as the industry transforms. That said, whenever profits become more difficult to project, valuations are more
challenging to determine. As a result, Kerrigan Advisors will continue to monitor the electrification plans for each OEM
and will discuss the potential valuation shifts in future reports, particularly if an OEM changes a dealer’s retail sales
compensation method.
“Attempts to predict what the automotive industry will look like in 2030 only serve to highlight how
uncertain its future really is.”
Volkswagen Looks Beyond Car Ownership, Even as It Surges
The Wall Street Journal, July 13, 2021
For the second quarter of 2021, Kerrigan Advisors made no adjustments to our blue sky multiples. The industry’s
tremendous profit performance is resulting in stronger blue sky values for most franchises. While the future of inventory
availability remains uncertain, most dealers are thriving in a low supply, high demand market. In this environment, most
franchises are trading on the higher end of our multiple ranges, when applying them to an average of pre-pandemic and
trailing twelve months earnings. The rising tide of industry profits is having the effect of lifting all franchise boats.
“They [OEMs] understand that their costs are down on supporting inventories…this wave is raising all
boats.”
Roger Penske, Chairman & CEO, Penske Automotive Group
Second Quarter 2021 Earnings Call
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