consolidation in auto retail (dealerships)
TRANSCRIPT
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October 18th-20th, 2015The Bellagio Hotel, Las Vegas
In Buffett’s Crosshairs:Revolutionizing Automotive Retailing
Brad Mewes, PrincipalSupplementFinancial Insight for the Automotive Aftermarket
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Warren Loves Cars
The Consolidation Curve
Inorganic Growth
What Not to Do
Pricing Trends and Valuation Methods
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WARREN LOVES CARSThe Current State of the Industry and WhyConsolidation Will Likely Continue
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Welcome to the car business, WarrenMike Jackson, CEO Auto Nation
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Why Invest in Auto Retail
Source: YCharts
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Why Invest in Auto Retail
Source: NADA, The Haig Report, 2015
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Why Invest in Auto Retail
Source: The Haig Report, 2015
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What is Private Equity???
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What does Warren see inAutomotive Retail?
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“In business, I look for economiccastles protected by unbreachable
‘moats’”
--Warren Buffett, BerkshireHathaway
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“There are about 17,000dealerships in the country, andownership transfers alwaysrequire approval by the relevantauto manufacturer. Berkshire's jobis to perform in a manner that willcause manufacturers to welcomefurther purchases by us.”
--Warren Buffett, BerkshireHathaway
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“I fully expect we’ll buy a lot moredealerships over time.
We will hear, I predict, fromhundreds of dealerships in thenext year.”
--Warren Buffett, BerkshireHathaway
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Did Buffett miscalculate?
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CONSOLIDATION CURVEThe big get bigger. How industry lifecycles impactcompetition and consolidation.
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"In the future -- I don'tknow how far in thefuture -- the smallergroups will be similar toours: a billion dollars insales.”
--Rick Case, Rick CaseAutomotive Group
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"There's a hugeopportunity forconsolidation in autodealerships…
How big is big really?”
--Larry Van Tuyl,Berkshire Automotive
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Stage 1:Fragmentation
Stage 2:Acquisitions
Stage 3:Expansion
Stage 4:Maturity
Market Share 10% - 30% 15% - 45% 35% - 70% 70% - 90%
GrowthOne-Off
AcquisitionsPlatform
AcquisitionsMega Deals &Greenfields
Defense &Maintenance
StrategyBuild
Revenues andBrand
M&A andIntegration
Profitability &Scale
ManageRegulatory
Environment
Stages of Consolidation
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Economies of Scale:
The reduction in average and marginal costs arising from anincrease in size of an operating unit.
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Source: Roland Berger
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InvestmentInvestment
CompetitiveAdvantage
CompetitiveAdvantage
RetainedEarningsRetainedEarnings
Acquisitions,Scale,
Barriers toEntry
Acquisitions,Scale,
Barriers toEntry
BusinessAttracts
AdditionalCapital
BusinessAttracts
AdditionalCapital
The Virtuous Cycleof
Investment
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Stand Pat: Operational Excellence
Grow: Develop Scale
Sell: Realize Value Now
Options
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INORGANIC GROWTHBuild and Execute an Inorganic Growth Strategy
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Source: The Banks Report, Author’s Calculations
0
5
10
15
20
25
30
35
40
45
50
Deal
ersh
ips
Acqu
ired
Most Acquisitive Dealer Groups2013 to June 2015
(Excluding Berkshire)
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Source: The Banks Report, Author’s Calculations
0
5
10
15
20
25
Num
ber o
f Dea
lers
hips
Acq
uire
dMost Acquisitive Private Dealer Groups
Since 2013
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Start with the end in mind
Build a team; both internally andexternally
A proactive acquisition strategy
Develop non-auction deal flow
Evaluate your alternatives
Five Inorganic Growth Success Factors
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Start with the End in Mind
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Build a Team,
Internally and Externally
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Proactive
Acquisition Strategy
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Non-AuctionDeal Flow
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Evaluate Your
Investment Alternatives
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WHAT NOT TO DOIdentify and avoid common buy side pitfalls
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Over-optimistic Projections
Lack of Focus
It Really Is All About the People
Post Deal Integration
Ignore the Advisors
Five Common Acquisition Mistakes
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Over-optimistic Projections
Lack of Focus
It Really Is All About the People
Post Deal Integration
Ignore the Advisors
Five Common Acquisition Mistakes
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Over-optimistic Projections
Lack of Focus
It Really Is All About the People
Post Deal Integration
Ignore the Advisors
Five Common Acquisition Mistakes
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Over-optimistic Projections
Worst Case Scenarios Cash Flow vs Profit Working Capital Needs Under Capitalized / Insufficient
Funding Deals take on a life of their own
Five Common Acquisition Mistakes
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Over-optimistic Projections
Lack of Focus
It Really Is All About the People
Post Deal Integration
Ignore the Advisors
Five Common Acquisition Mistakes
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Lack of Focus
Strategic Drift Diligent Due Diligence Existing Team Bandwidth
Five Common Acquisition Mistakes
Overworked Team`
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Over-optimistic Projections
Lack of Focus
It Really Is All About the People
Post Deal Integration
Ignore the Advisors
Five Common Acquisition Mistakes
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It Really Is All About the People
Ego Culture New Team Integration Who’s Responsible for What?
Five Common Acquisition Mistakes
Overworked Team`
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Over-optimistic Projections
Lack of Focus
It Really Is All About the People
Post Deal Integration
Ignore the Advisors
Five Common Acquisition Mistakes
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Post Deal Integration
Cost Synergies Cash Needs OEM Integration IT, HR, Accounting, Shared
Services, etc.
Five Common Acquisition Mistakes
Overworked Team`
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Over-optimistic Projections
Lack of Focus
It Really Is All About the People
Post Deal Integration
Ignore the Advisors
Five Common Acquisition Mistakes
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Over-optimistic Projections
Lack of Focus
It Really Is All About the People
Post Deal Integration
Ignore the Advisors
Five Common Acquisition Mistakes
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WHAT IS IT WORTH?Dealer Pricing Trends and Valuation Methods
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Tangible Net Assets + Blue Sky
DCF, IRR & Hurdle Rates
Multiples & Comps
Strategic vs Financial
Control & Liquidity Premiums
A Primer on Valuation
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Brand
Location / Market
Management Team
Facility
Operational Excellence
Non Financial Premiums
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Recent Comps
Source: The Haig Report, 2015
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October 18th-20th, 2015The Bellagio Hotel, Las Vegas
Thank You!Please take a moment torate my presentation inthe DSES mobile app!
Brad MewesPrincipal, SupplementFinancial Insight for the Automotive [email protected]