Digital Dealer - January 2019 - 20

D E A L E R OP S & M ANAGEM ENT: Ownership Continued from pg. 19

CHART 3

Cost of Capital
28.6%

7.5%

Leucadia's Average
Return on Equity from
Garff Investment
(2015-2017)

Garff's 5-Year Bond
Yield Investment

SOURCE: SEC FILINGS, COMPANY PRESS RELEASES

OEMs are more comfortable
with the family office structure/governance because it
is very similar to that of the
large family-owned dealership groups. In fact, many
of the largest auto retailers
have their own family offices
for investment purposes.
On the debt side, the largest U.S. banking institutions
continue to finance sizable
acquisitions for growing
dealership groups. These
lenders focus on identifying
the dealers who will drive
industry consolidation and
want to ensure they are part
of the tremendous financing
opportunity consolidation will
provide. They also feel a
sense of urgency to develop
relationships with buyers,
rather than sellers, to retain
market share in the long
20

JANUARY 2019

term.
In addition to traditional
lenders, bond investors
have shown a willingness
to finance private group
expansion and buyouts.
Most recently, the Ken
Garff Automotive Group,
one of the largest private
dealership groups in the
U.S. with over $4.5 billion in
revenue, successfully sold
$375 million worth of bonds
to finance the buyout of its
equity partner, Leucadia.
Garff's buyout of Leucadia,
which is the largest transaction of 2018, resulted
in an enterprise value for
Garcadia of $675 million.
Garff likely chose to finance
the buyout with debt, rather
than equity due to the lower
cost of capital charged in
the bond markets. Garff's

D I G I TA L D E A L E R . C O M

bonds pay a 7.5% interest
rate, which may seem high
relative to traditional bank
financing; however, it is very
low relative to private equity
which usually requires at
least a 20% return (as can
be seen in Leucadia's high
returns noted in Chart 3).
As auto retail continues
to consolidate, Kerrigan
Advisors expects the pool of
capital available to growing dealership groups with
well-conceived expansion
plans will increase, providing
multiple financing options for
growth.
TO ACHIEVE PRICING
GOALS, SELLERS
INCREASINGLY
ACCEPT STRUCTURED
TRANSACTIONS

Blue sky multiples have
remained relatively consistent in 2018, despite the
industry's sales plateau.
Seller's understand their
blue sky may have declined
due to lower earnings;
however, they still expect
a strong blue sky multiple
in order to complete a sale.
This can be tricky for buyers
in a rising interest rate environment where their cost of
capital is also increasing.
Kerrigan Advisors finds
the most innovative buyers
are meeting seller's pricing expectations and their
own return on investment
requirements through structured transactions. These
transactions usually include
some form of seller financing and/or the retention of
a minority ownership stake
by the seller (also known
as "rollover equity"). In both
cases, these structures
reduce the equity capital

required of the buyer and
thus increase the buyer's
return on equity, while still
meeting the seller's pricing
expectations.
In the case of rollover
equity, the seller usually
retains a minority ownership
position in the dealership
post-transaction. Unlike
traditional buy/sells, which
are typically asset sales,
these transactions are usually stock transactions and
subject to increased government oversight, particularly
as the transaction increases
in size and complexity. In
most of these transactions,
the seller contributes their
business' assets to a new
legal entity which then sells
stock to the buyer. It should
be noted that only brokers
who are licensed with
FINRA and regulated by the
SEC are legally permitted
to sell stocks or securities in
a private company with few
exceptions. A buyer could
rescind the transaction after
closing if it is found that the
seller is not represented by
a licensed broker.
.

RYAN KERRIGAN is managing
director at Kerrigan Advisors.
Kerrigan Advisors is a leading
advisor to sellers of higher
value dealerships and dealership groups throughout the U.S.
Ryan works with private equity
clients advising them on their
auto retail investment strategy
and works with sell-side clients
seeking private equity exit. Ryan
has extensive experience in both
private equity and auto retail,
having run his family's dealership.
He started his career at McKinsey
& Company as a management
consultant, advising Fortune 500
companies on growth strategies,
organizational issues, pricing,
and business valuation. EMAIL:
ryan@kerriganadvisors.com.
http://www.DIGITALDEALER.COM
Digital Dealer - January 2019

Table of Contents for the Digital Edition of Digital Dealer - January 2019
