Investors view dealerships as good bets

Billionaire Warren Buffett is paving the way for more outside investors to buy large dealership groups, experts said.

The purchase of Van Tuyl Group, the largest privately owned U.S. auto dealership group, by Buffett's Berkshire Hathaway Inc. will "embolden people sitting on the sidelines who didn't think they could get into the automobile business," said Mark Johnson, president of MD Johnson Inc. in Seattle.

Buy-sell advisers such as Johnson say they have seen growing interest from private-equity and outside investors in buying car dealerships, but in recent weeks, the pace of that interest is quickening.

"We get more and more inquiries," Johnson said. "They are all yield hungry."

Outsiders typically look for a return on investment that tops 15 percent, maybe even 20 percent, experts said. They said few other investment classes offer the return and ability to survive a recession that dealerships do.

'It's tricky'

Increasing interest is coming from family offices, the investment arms for wealthy families, buy-sell advisers said.

But because automakers can kill a deal, outsiders are sometimes reluctant to pursue a purchase.

"It's tricky because of the manufacturer controls over ownership. That will continue to be a restraint," said Brodie Cobb, executive chairman of Presidio Group in San Francisco. Even so, he predicted, "You'll see other large transactions. They won't be as large as this one because there's no private dealership as large as this one."

Alan Haig, president of Haig Partners, a dealership buy-sell advisory firm in Fort Lauderdale, Fla., said he was recently retained by a very large private investment company to "find opportunities just like this. So I would assume others would wake up to the fact that the returns in automotive retail can be very attractive."

Haig's new client has a long-term investment horizon, he said. Haig pointed out that private-equity firms typically have a shorter timeline of five to seven years. That has limited deals because automakers are likely to only approve deals with buyers with long-term strategies.

'Entry barriers'

Buy-sell adviser Jason Stopnitzky said a lot of people have been attracted to the industry, but "they don't know how to penetrate the entry barriers."

"Then Warren Buffett comes along and makes a multibillion acquisition. It'll keep the interest of a lot of people," said Stopnitzky, partner at Performance Brokerage Services in Irvine, Calif.

Stopnitzky said that about six months ago, he brokered a deal involving an outsider buying a Honda store in the Southwest. "They're already looking for a second deal right now," he said. He also is working on a $30 million purchase of a dealership by an investor from the airline industry.

Outside investors aren't new. Hedge fund giant Edward Lampert and Microsoft Corp. founder Bill Gates have large stakes in AutoNation Inc., the nation's largest dealership group. RLJ Cos., led by Robert Johnson, the founder of Black Entertainment Television, has the majority stake in RML Automotive, formerly called RLJ McLarty Landers Automotive.

Outside help

One of the best-known examples of a wealthy family buying dealerships is the Pohlad brothers of Minnesota, who also own the Minnesota Twins baseball team. The sons of self-made billionaire Carl Pohlad bought their first dealership in 2008 and now operate 11 through their Twin Cities Automotive.

Two dealership groups which have been among the most active acquirers in recent years are expanding with the help of outside money.

Ken Garff Automotive Group in Salt Lake City has grown to 46 stores with the backing of Leucadia National Corp., a public investment company often described as a mini version of Berkshire Hathaway. Leucadia and Garff own 21 dealerships through a joint venture and continue to look for acquisition opportunities.

Prime Motor Group in New England has grown to 21 stores with the backing of Abrams Capital, a private equity firm in Boston.

After selling his family's dealerships to Group 1 Automotive Inc. in 2000, longtime dealer David Rosenberg ran Group 1's platform in the region. When Group 1 moved to centralize its operations in 2006, reducing regional autonomy, Abrams Capital founder David Abrams offered to back a new dealership group. "Rather than buy a couple of dealerships with my own money, I invested along with him," Rosenberg said.

Abrams is making a long-term investment, and has no plan to exit the venture, Rosenberg said. Prime continues to seek acquisitions.

Amy Wilson contributed to this report.