What the Lithia-Pfaff Deal Means to the Canadian Dealership Industry
Earlier this summer, news trickled out that Lithia Motors, a U.S.-based publicly traded company, had acquired Pfaff Auto, one of Canada’s well-known automotive dealership groups. Make no mistake, this one acquisition has the potential to significantly change the Canadian retail automotive landscape and the course of consolidation in this industry.
We use the word “potential” because the Canadian retail space has a long list of U.S.-based companies that came to Canada seeking to expand beyond their base only to exit Canada and retrench back to the U.S. in a relatively short period. Let’s assume for the moment that it’s going to be different this time; or at least, different for the retail automotive industry. If Lithia Motors permanently remains in Canada, it would go a long way to answering the questions that industry insiders like Dennis DesRosiers
have been asking for years. That is: What is the exit strategy of the midsize to large groups in Canada? As the owners of these large automotive groups in Canada retire, who has the capital required to purchase these dealerships?
These questions have been asked for at least a decade as an increasing number of automotive groups emerged. Consider that in 2000, only 9% of all new vehicle sales were made through group-owned dealerships. According to DesRosiers, that number had increased to over 58% by 2018 and has only increased since. In that same period, groups with five dealerships or more increased from 27 groups to 127.1
Barriers to entry no more?
These questions have not been easy to answer due to several factors unique to the Canadian automotive retail sector.
- Some OEMs in Canada continue to restrict public company ownership. This has precluded AutoCanada, Canada’s only publicly traded retail automotive company (and any other publicly traded company), from buying certain OEM franchised dealerships and groups.
- Similarly, while large pools of capital exist among North American private equity firms, OEMs in Canada have resisted the urge to allow them to acquire dealerships in Canada. Private equity firms and publicly traded companies are by far the front runners in terms of having the financial resources required to acquire midsize to large retail automotive groups.
This is why Lithia’s acquisition of Pfaff Auto and its entry into Canada is interesting. While it hasn’t changed the reluctance of some OEMs to allow for public ownership of its dealerships, it has at the very least created another avenue for dealership groups to sell into.
As Lithia, AutoCanada and most likely other publicly traded companies buy automotive dealership groups in Canada, pressure will undoubtedly mount on those OEMs that continue to restrict public ownership of its dealerships. This pressure will not only come from the prospective buyers, but also from the owners of its dealerships, who will need viable options to sell their dealerships to.
Impact on transaction multiples
To date, the information regarding the Pfaff deal has been scarce, and we may never know how much Lithia paid to acquire the company. Having said that, we do know that as of Sept.10, 2021, Lithia was trading at an 8xEV/EBITDA multiple and a 10xP/E multiple.
| P/E Multiple |
EV/EBITDA Multiple |
||||
| Company | Ticker | 2021 | 2022 | 2021 | 2022 |
| Asbury Automotive Group, Inc. | ABG | 7.0x | 8.1x | 6.3x | 7.2x |
| AutoNation, Inc. | AN | 6.8x | 8.1x | 5.1x | 6.0x |
| Group 1 Automotive, Inc. | GPI | 4.8x | 5.5x | 4.4x | 5.1x |
| Lithia Motors, Inc. | LAD | 9.9x | 10.1x | 7.9x | 7.9x |
| Penske Automotive Group, Inc. | PAG | 6.7x | 8.3x | 5.3x | 6.4x |
| Sonic Automotive, Inc. | SAH | 6.4x | 6.2x | 4.3x | 4.3x |
| Average U.S. Multiples | 6.9x | 7.7x | 5.6x | 6.2x | |
| Auto Canada Inc. | ACQ | 15.4x | 13.9x | 6.3x | 6.0x |
In its most recent quarterly 10-Q filing with the SEC, Lithia stated that it seeks “to find accretive acquisitions” with a “target an annual after-tax return of more than 15%”. This means Canadian sellers should only expect to garner selling multiples that are lower than those public companies are trading at. Having said that, with an exchange rate of US$0.80 to the Canadian dollar, it does leave room for a U.S. buyer to pay 7.5x to 9.0x EV/EBITDA and 10.5x to 12.0x P/E on Canadian dollar earnings.
While these publicly traded companies have the financial resources to acquire automotive dealerships groups, they will likely still only pay what we have seen dealerships transact at in the private market. The takeaway here is Canadian dealership sellers will have more options to sell into, but the expectations should be that higher selling multiples will not be a result.
Despite AutoCanada being a consolidator in the Canadian marketplace for the last 20 years, of the more than 3,400 OEM franchised dealerships in Canada, public ownership of Canadian automotive dealerships is negligible. This means that as companies like Lithia and other public market entrants acquire dealer groups and dealerships in Canada, the runway for acquiring profitable dealerships that will be accretive to their earnings is a very long one. Generally speaking, this means single-owned dealerships and those that are underperforming will not be acquisition targets for many, many years.
Follow the leader
Another potential impact of Lithia’s entry into the Canadian market is that it could pave the way for more U.S. entrants. Why is this important? In the U.S. alone, there are at least 55 privately held dealership groups that, according to the WardsAuto 2020 MegaDealer 100 ranking, generate over US$1 billion in revenue. One of the largest privately held dealership groups in the U.S. is believed to be Berkshire Hathaway Automotive, which owns 78 dealerships that generate over US$8 billion in annual revenue. Another is the Hendrick Automotive Group, which generates over US$10 billion in annual revenue through its 94 dealerships. By comparison, Asbury Automotive Group, which is the smallest of the U.S. publicly traded companies, generates US$7.2 billion through its 88 dealerships.
If some of these large, privately held dealership groups follow Lithia’s lead and enter the Canadian market, it would seemingly solve the problem of some OEMs in Canada not allowing their dealerships to be publicly owned. Thus, the potential of having to sell off some dealerships in a separate deal prior to selling to a publicly held company won’t exist as privately held dealer groups could acquire an entire group without running into such OEM restrictions.
Although these privately held companies would not have access to the capital markets to raise acquisition funds if needed, there is no question that they have the capital or could raise it privately, allowing them to make meaningful acquisitions in Canada. For its part, Berkshire Hathaway, the parent company of Berkshire Hathaway Automotive, held over $149 billion in cash as of September 30, 2021.
What about the real estate?
Generally speaking, publicly traded companies would not buy the real estate associated with the dealership. This, however, should not keep anyone up at night. As we have seen with dealership transactions to date in the private market, the owner of the dealership and its associated property can choose to retain the real estate.
If the desire is to sell the property, there are many options including:
- Companies dedicated to acquiring the real estate that automotive dealerships operate out of, such as Automotive Properties REIT and Capital Automotive.
- Other real estate investment trusts, or REITs, that acquire retail and commercial properties.
- Local investors and companies that specialize in acquiring retail and commercial properties.
Conclusions
While there was little fanfare or any major press about Lithia’s acquisition of Pfaff Auto, its entry into Canada has the potential to shape the next consolidation phase of Canada’s retail automotive dealership space. While higher multiples should not be the expectation, owners of midsize to large dealerships groups may now have a new divestiture avenue that didn’t exist at the start of 2021.
And if other U.S. entrants are to follow—namely well-financed, privately held dealership groups—then any dealership, regardless of the brand it represents, would have a potential buyer that could close an acquisition of a sizable automotive group. That is something the Canadian retail automotive space has not had until now, and that is why Lithia’s entry into Canada could change everything!
1 DesRosiers Automotive Consultants
Read more
BMO Automotive Finance
Tom Varesh, Senior Relationship Manager Samuel Walton, Portfolio Manager
Earlier this summer, news trickled out that Lithia Motors, a U.S.-based publicly traded company, had acquired Pfaff Auto, one of Canada’s well-known automotive dealership groups. Make no mistake, this one acquisition has the potential to significantly change the Canadian retail automotive landscape and the course of consolidation in this industry.
We use the word “potential” because the Canadian retail space has a long list of U.S.-based companies that came to Canada seeking to expand beyond their base only to exit Canada and retrench back to the U.S. in a relatively short period. Let’s assume for the moment that it’s going to be different this time; or at least, different for the retail automotive industry. If Lithia Motors permanently remains in Canada, it would go a long way to answering the questions that industry insiders like Dennis DesRosiers have been asking for years. That is: What is the exit strategy of the midsize to large groups in Canada? As the owners of these large automotive groups in Canada retire, who has the capital required to purchase these dealerships?
These questions have been asked for at least a decade as an increasing number of automotive groups emerged. Consider that in 2000, only 9% of all new vehicle sales were made through group-owned dealerships. According to DesRosiers, that number had increased to over 58% by 2018 and has only increased since. In that same period, groups with five dealerships or more increased from 27 groups to 127.1
Barriers to entry no more?
These questions have not been easy to answer due to several factors unique to the Canadian automotive retail sector.
- Some OEMs in Canada continue to restrict public company ownership. This has precluded AutoCanada, Canada’s only publicly traded retail automotive company (and any other publicly traded company), from buying certain OEM franchised dealerships and groups.
- Similarly, while large pools of capital exist among North American private equity firms, OEMs in Canada have resisted the urge to allow them to acquire dealerships in Canada. Private equity firms and publicly traded companies are by far the front runners in terms of having the financial resources required to acquire midsize to large retail automotive groups.
This is why Lithia’s acquisition of Pfaff Auto and its entry into Canada is interesting. While it hasn’t changed the reluctance of some OEMs to allow for public ownership of its dealerships, it has at the very least created another avenue for dealership groups to sell into.
As Lithia, AutoCanada and most likely other publicly traded companies buy automotive dealership groups in Canada, pressure will undoubtedly mount on those OEMs that continue to restrict public ownership of its dealerships. This pressure will not only come from the prospective buyers, but also from the owners of its dealerships, who will need viable options to sell their dealerships to.
Impact on transaction multiples
To date, the information regarding the Pfaff deal has been scarce, and we may never know how much Lithia paid to acquire the company. Having said that, we do know that as of Sept.10, 2021, Lithia was trading at an 8xEV/EBITDA multiple and a 10xP/E multiple.
| P/E Multiple |
EV/EBITDA Multiple |
||||
| Company | Ticker | 2021 | 2022 | 2021 | 2022 |
| Asbury Automotive Group, Inc. | ABG | 7.0x | 8.1x | 6.3x | 7.2x |
| AutoNation, Inc. | AN | 6.8x | 8.1x | 5.1x | 6.0x |
| Group 1 Automotive, Inc. | GPI | 4.8x | 5.5x | 4.4x | 5.1x |
| Lithia Motors, Inc. | LAD | 9.9x | 10.1x | 7.9x | 7.9x |
| Penske Automotive Group, Inc. | PAG | 6.7x | 8.3x | 5.3x | 6.4x |
| Sonic Automotive, Inc. | SAH | 6.4x | 6.2x | 4.3x | 4.3x |
| Average U.S. Multiples | 6.9x | 7.7x | 5.6x | 6.2x | |
| Auto Canada Inc. | ACQ | 15.4x | 13.9x | 6.3x | 6.0x |
In its most recent quarterly 10-Q filing with the SEC, Lithia stated that it seeks “to find accretive acquisitions” with a “target an annual after-tax return of more than 15%”. This means Canadian sellers should only expect to garner selling multiples that are lower than those public companies are trading at. Having said that, with an exchange rate of US$0.80 to the Canadian dollar, it does leave room for a U.S. buyer to pay 7.5x to 9.0x EV/EBITDA and 10.5x to 12.0x P/E on Canadian dollar earnings.
While these publicly traded companies have the financial resources to acquire automotive dealerships groups, they will likely still only pay what we have seen dealerships transact at in the private market. The takeaway here is Canadian dealership sellers will have more options to sell into, but the expectations should be that higher selling multiples will not be a result.
Despite AutoCanada being a consolidator in the Canadian marketplace for the last 20 years, of the more than 3,400 OEM franchised dealerships in Canada, public ownership of Canadian automotive dealerships is negligible. This means that as companies like Lithia and other public market entrants acquire dealer groups and dealerships in Canada, the runway for acquiring profitable dealerships that will be accretive to their earnings is a very long one. Generally speaking, this means single-owned dealerships and those that are underperforming will not be acquisition targets for many, many years.
Follow the leader
Another potential impact of Lithia’s entry into the Canadian market is that it could pave the way for more U.S. entrants. Why is this important? In the U.S. alone, there are at least 55 privately held dealership groups that, according to the WardsAuto 2020 MegaDealer 100 ranking, generate over US$1 billion in revenue. One of the largest privately held dealership groups in the U.S. is believed to be Berkshire Hathaway Automotive, which owns 78 dealerships that generate over US$8 billion in annual revenue. Another is the Hendrick Automotive Group, which generates over US$10 billion in annual revenue through its 94 dealerships. By comparison, Asbury Automotive Group, which is the smallest of the U.S. publicly traded companies, generates US$7.2 billion through its 88 dealerships.
If some of these large, privately held dealership groups follow Lithia’s lead and enter the Canadian market, it would seemingly solve the problem of some OEMs in Canada not allowing their dealerships to be publicly owned. Thus, the potential of having to sell off some dealerships in a separate deal prior to selling to a publicly held company won’t exist as privately held dealer groups could acquire an entire group without running into such OEM restrictions.
Although these privately held companies would not have access to the capital markets to raise acquisition funds if needed, there is no question that they have the capital or could raise it privately, allowing them to make meaningful acquisitions in Canada. For its part, Berkshire Hathaway, the parent company of Berkshire Hathaway Automotive, held over $149 billion in cash as of September 30, 2021.
What about the real estate?
Generally speaking, publicly traded companies would not buy the real estate associated with the dealership. This, however, should not keep anyone up at night. As we have seen with dealership transactions to date in the private market, the owner of the dealership and its associated property can choose to retain the real estate.
If the desire is to sell the property, there are many options including:
- Companies dedicated to acquiring the real estate that automotive dealerships operate out of, such as Automotive Properties REIT and Capital Automotive.
- Other real estate investment trusts, or REITs, that acquire retail and commercial properties.
- Local investors and companies that specialize in acquiring retail and commercial properties.
Conclusions
While there was little fanfare or any major press about Lithia’s acquisition of Pfaff Auto, its entry into Canada has the potential to shape the next consolidation phase of Canada’s retail automotive dealership space. While higher multiples should not be the expectation, owners of midsize to large dealerships groups may now have a new divestiture avenue that didn’t exist at the start of 2021.
And if other U.S. entrants are to follow—namely well-financed, privately held dealership groups—then any dealership, regardless of the brand it represents, would have a potential buyer that could close an acquisition of a sizable automotive group. That is something the Canadian retail automotive space has not had until now, and that is why Lithia’s entry into Canada could change everything!
1 DesRosiers Automotive Consultants
What to Read Next.
The Time Is Right to Explore Used Car Export Opportunities
Robert Sadokierski | October 19, 2021 Dealer Finance
The discrepancy in used car values in Canada and the U.S., low inventory levels and a tight new vehicle market all combine to make used car exportati…
Continue Reading>
Tell us three simple things to
customize your experience
