(BRK.A), (BRK.B)
When Berkshire Hathaway jumped into the auto retailing business in March 2015, with its $4.1 billion acquisition of the Van Tuyl Group, it added a whole new line of business to the mega-conglomerate.
The Van Tuyl Group was the largest privately owned auto dealership group in the U.S., and instantly made the newly christened Berkshire Hathaway Automotive Group the fourth largest dealership group in the U.S.
The Van Tuyl acquisition was just the beginning, Warren Buffett noted in his 2015 Berkshire Hathaway Chairman’s Letter, stating, “…if we can buy dealerships at sensible prices – we will build a business that before long will be multiples the size of Van Tuyl’s $9 billion of sales.”
BHA got off to a promising start, as that same month it acquired Frank Kent Honda of Fort Worth, Texas.
“This is the beginning of a journey that will have no end,” Buffett noted upon completion of the acquisition. “Cecil and Larry have given us the ideal platform with which to build an auto dealership business that will be thriving and growing 50 and 100 years from now. The fun has just started.”
Unfortunately for Berkshire, the acquisition of also Van Tuyl set off a dramatic rise in auto dealership valuations that has rippled throughout the industry, and frustrated efforts for Berkshire to add new dealership groups at what it feels are reasonable valuations.
At the 2016 Berkshire Hathaway annual meeting, Buffett acknowledged that they “hadn’t had much luck” in acquiring more dealerships.
BHA finally made some progress in June, acquiring North Park Toyota in San Antonio, Texas. The acquisition includes a 20-year lease of North Park Toyota’s 23.7-acre property that includes an option to buy.
The Problem is Soaring Valuations
The steep rise in valuations has kept Berkshire Hathaway Automotive mostly on the sidelines even as the Kerrigan Advisors’ Blue Sky Report showed that U.S. dealership buy/sell activity soared to record highs in 2015. The Report noted “activity by new entrants outpacing public company acquisitions by over four to one.”
The Blue Sky Report showed that while the competition for auto dealerships was fierce in 2015, it did not favor the public companies, which in addition to Berkshire Automotive also includes CarMax and Penske Automotive Group.
“A number of iconic multi-dealership groups came to market in 2015 and were acquired by both established consolidators and new entrants. Faced with this stiffer competition, the publics found it more difficult to compete for larger group transactions, and represented just 7% of the buy/sell market in 2015. Meanwhile new dealership buyers, including family offices, private equity firms, and public conglomerates, acquired 29% of the franchises sold, a stunning accomplishment,” said Erin Kerrigan, Managing Director of Kerrigan Advisors. “We believe new entrants will increasingly shape dealership consolidation and meaningfully impact the future of auto retail.”
The Blue Sky Report went on to note that while the market for auto dealerships is still very active, the market may be peaking.
“In 2015, dealership valuations rose to historically high levels, new entrants made sizable acquisitions, manufacturers approved numerous multi-dealership transactions, and real estate prices returned to pre-recession levels,” continued Kerrigan. “In summary, it was a year that is hard to beat. While the 2016 buy/sell market is expected to be as active as 2015, we anticipate the proportion of sellers completing a successful sale could decline as industry growth plateaus and dealership earnings flatten.”
A Boston Plum Waiting to be Picked
Despite the rise in dealership valuations, or maybe because of them, a plum Boston dealer group looks all the more perfect with its opening of two new dealerships.
Herb Chambers Companies, a privately-held, Boston-based, dealership group with 57 total dealerships, looks to be the perfect fit for Berkshire Hathaway Automotive.
The company already sells more cars than anyone in New England, and in June it opened Herb Chambers Lincoln of Norwood and Herb Chambers Volvo Cars Norwood.
Is it for Sale?
Herb Chambers Companies is owned by Herb Chambers, a former copier salesman who has spent the past thirty years building a first class dealership group that is the 12th largest privately held auto group in the nation.
Herb Chambers has already stated that he would sell if the price is right. He also credits Warren Buffett’s Van Tuyl Group acquisition for boosting his personal net worth to some $1.5 billion, as valuations jumped throughout the whole sector.
Chambers Knows When to Sell
Herb Chambers is certainly not afraid to sell when the time is right. Three decades ago he founded A-Copy America, and after merging it with Ikon Office Solutions, he cashed out with a sale to Ricoh. It was a shrewd move, and Chambers has proved to be a shrewd guy.
With auto sales possibly peaking, now may be the time. Could the perfect exit strategy for Herb Chambers this time involve Berkshire?
© 2016 David Mazor
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Disclosure: David Mazor is a freelance writer focusing on Berkshire Hathaway. The author is long in Berkshire Hathaway, and this article is not a recommendation on whether to buy or sell the stock. The information contained in this article should not be construed as personalized or individualized investment advice. Past performance is no guarantee of future results.