Texas Auto Dealers Association 2016 - Kerrigan Advisors

Dealerships Are Far Too Valuable To Be Sold Any Other Way

Buy/Sell Activity Market Drivers Valuation Trends Recent Seller’s Panel

Overview of Session

Lots of Activity in the Buy/Sell Market

Lots of Activity in the Buy/Sell Market

Source: The Banks Report

Number of Transactions2013 to 2015

Acquisition Activity Grew 111% since 2013

2013 2014 2015

114 Transac-tions

206 Transac-tions

241 Transac-tions

81%

Increas

e

17%

Increase

“Some of these big deals come in as package deals. When it is one store and they are selling them as a bundle, it is hard to exercise our right of refusal.”

Steve Cannon, Prior CEO of Mercedes-Benz USA, July 2015 Automotive News

2014 2015

3.2

6.3

Average Franchises per Multi-Dealership Transaction

Sold Dealership Groups Double in Size in 2015

Big Players Find Big Exits

81 Stores

13 Stores

11 Stores

8 Stores

11 Stores

McLarty Auto

The Largest Transactions Announced or Closed in 2015

Public 7%

New29%

Private64%

2015

Public22%

Private78%

2014


New Entrants Dominate Platform Acquisitions

Buyer Market Share

AutoNation Dramatically Increases Number of Acquisitions

“We're very patient, we've been very patient for a very long time. But I've always said, when the opportunity is there, we will move and we're in one of those periods.”

Mike Jackson, CEOAutoNation (AN)3rd Quarter Earnings Call

AutoNation’s Dealership Acquisitions2014 versus 2015

2014 2015

5

22

Source: SEC Filings

4 tim

es

2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015

$767$570

$1,046

$392

$803$654

$283$14 $211

$504 $502$659

$1,449

$832

Source: SEC Filings

Public Dealership Group Acquisition Spending in USSince 2002

- 43%

The Publics Acquisition Spending Declines in 2015

US Dealership Market Share

Source: Automotive News

14,930 dealerships are ownedBy small groups and individuals

Top 125 Dealership Groups

Small Dealership Groups and Individual Dealers

5.2%

82.9%

0.118166666666667

Non-Public DealershipsPublic Dealership Groups

The Publics Own Just 5.2% of US Dealerships – Auto Retail Remains Fragmented

Time to Take Chips Off the Table

How Many More Wild Rides?

2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015$0

$200,000

$400,000

$600,000

$800,000

$1,000,000

$1,200,000

$1,400,000

$279,685

$1,166,675

Source: NADA and Kerrigan Advisors Analysis

Average Dealership Earnings

Average Dealership Earnings at Peak Levels?

2000-2007Average Earnings $542,881

2008-2015

23% Compound Annual Growth

New Normal or Peak?

1/3/20

00

9/3/20

00

5/3/20

01

1/3/20

02

9/3/20

02

5/3/20

03

1/3/20

04

9/3/20

04

5/3/20

05

1/3/20

06

9/3/20

06

5/3/20

07

1/3/20

08

9/3/20

08

5/3/20

09

1/3/20

10

9/3/20

10

5/3/20

11

1/3/20

12

9/3/20

12

5/3/20

13

1/3/20

14

9/3/20

14

5/3/20

15

1/3/20

160

100

200

300

400

500

600

700

800

Source: SEC Filings

THE KAR INDEX

Introducing The Kerrigan Auto Retail Index – THE KAR INDEX™

12/31

/2015

563.02 2015.12.31 – Market Close

Publics - Net Sellers

Some Buy/Sells

Distress

Market Takes O

ff

968% Rise (N

ov. 2008-Ju

ne 2015)

™

Green Street Commercial Property Price Index

Source: Green Street Advisors & Wall Street Journal

Real Estate Values Increasingly Drive Up Transaction Pricing

“For the right store and the right location, we're probably paying 20% to 25% more money than we did two or three years ago.”

Roger Penske, CEOPenske Automotive Group 3rd Quarter Earnings Call 20152007 2008 2009 2010 2011 2012 2013 2014 2015 2016

$60

$70

$80

$90

$100

$110

$120

$130$121

Higher Real Estate Values Result in Higher Transaction Values

Higher Real Estate Values Result in Higher Transaction Values

Annual Rent: $500,000

Earnings Before Taxes: $1,000,000

Total Blue Sky and Real Estate:

$11,100,000

Annual Rent @ 7%: $700,000

Earnings Before Taxes: $800,000

Total Blue Sky and Real Estate:

$13,200,000

Real Estate at7% Cap Rate:

$7,100,000

Blue Sky @ 4x:

$4,000,000

Appraisal: $10,000,000

Blue Sky @ 4x:

$3,200,000

Blue Sky Multiple

Real Estate Multiple

Multiples Cap Rates

3 33%4 25%5 20%6 17%7 14%8 13%9 11%

10 10%11 9%12 8%13 8%14 7%

Real Estate Values and Transaction Values

Luck Running Out?

Source: SEC Filings

THE KAR INDEX

The Kerrigan Auto Retail Index – The KAR Index™

6/5/20

15

6/22/2

015

7/9/20

15

7/26/2

015

8/12/2

015

8/29/2

015

9/15/2

015

10/2/

2015

10/19

/2015

11/5/

2015

11/22

/2015

12/9/

2015

12/26

/2015

1/12/2

016

1/29/2

016

2/15/2

016

400

450

500

550

600

650

700

750

KAR - Kerrigan Auto Retail Index

470.12 2016.2.29 – Market Close

709.27 2015.6.5 – Market Close

Down 33.7%

™

New Used

52 Months

37 Months

78 Months

63 Months

2005 2015

Average Length of Car Ownership

50%

70%

Source: HIS Automotive, George Petras, USA Today

50% Increase in Length of New Car Ownership Since 2005

New Car Loans by TermIn Q1 2015

29.5%

39.7%

21.3%

9.5%73-84 Months

61-72 Months

49-60 Months

Other

70% of New Car Loans Longer Than 5 Years

2010 2011 2012 2013 2014 2015 2016E 2017E0.0

2.0

4.0

6.0

8.0

10.0

12.0

14.0

16.0

18.0

20.0

0%

2%

4%

6%

8%

10%

12%

14%

16%

11.6 12.8

14.5 15.6

16.517.5 17.8 17.8

Total U.S. Light Vehicle YoY Growth

Source: Automotive News and Kerrigan Advisors Analysis/Estimates

17+ Million Sales Means Slower Future Growth

Update

11% 10%

13%

6%6%

2%

0%

Annual Auto Sales and % Growth

8%

Plateau?

Public Dealership Groups’ Average P/E Multiple

22.2x

Public P/E Multiples Down Since 2014

Source: Yahoo Finance and BofA

John Rickel, CFOGroup 1 AutomotiveFebruary 2016 4th Quarter Earnings Call

“The hurdle to have an acquisition is steeper than it would have been. Our shares are, obviously, a very attractive alternative for capital allocation at these prices.”

Q1 2016

2015

2014

2013

10.8x

12.7x

15.6x

15.6x

Public Estimated Blue Sky Multiples Down Since 2014

2013 2014 2015 Q1 2016

9.2x 9.1x

7.6x

6.3x

Blue Sky Multiples

Source: Kerrigan Advisors Analysis

Publics Estimated Blue Sky Multiples 2016 AUTOMOTIVE Q3:2015 MULTIPLES

($ in millions) AutoNation Penske Group 1 Asbury Sonic Lithia Total

Market Cap (as of 03/18/16) $5,385 $3,522 $1,370 $1,480 $875 $2,348 $14,980

Net Assets (515) (104) - (136) (177) (457) (1,389)

Estimated Blue Sky 4,870 3,418 1,370 1,345 698 1,891 13,591

Adjusted EBIT $715 $498 $221 $255 $194 $264 $2,147Blue Sky Multiple 6.8x 6.9x 6.2x 5.3x 3.6x 7.2x 6.3xSource: Kerrigan Advisors and SEC Public Filings

30% Decline

Kerrigan Advisors Luxury Blue Sky Multiples – March 2016

Luxury Franchise Blue Sky Multiple

Source: Kerrigan Advisors Analysis and Automotive News

Lexus BMW Mercedes Audi Porsche Land Rover - Jaguar*

Acura Infiniti Cadillac Volvo1

2

3

4

5

6

7

8

9

10

Ker

riga

n A

dvis

ors

Blu

e Sk

y M

ultip

les

Sales per Franchise

Lexus BMW Mercedes Audi Acura Infiniti Land Rover

Porsche Volvo Cadillac Jaguar

1,466

1,021 1,019

714 649 645

423 274 237 189

88

Land

Rov

erVolv

oInf

initi

Audi

Lexu

s

Porsch

eAcu

ra

Merced

es

Cadilla

cBMW

Jagu

ar

29.8%

17.6%

7.7% 5.1% 4.7% 4.2%

(0.1%)(0.9%)(2.9%)(3.6%)

(13.2%)

Market Share ChangeSales Per Franchise

1,466

1,021

1,019

714

274

423 LR 88 Jag

649

645

189

237

Market Share Change 2015 vs

2014

5%

-4%

-1%

+5%

+4%

+30% LR -13% Jag

-0%

+8%

-3%

+18%

Average Dealership Profitability

Consistently High Aa3

Consistently High A2




Consistently High (LR) Ba2

Consistently Low A1

Consistently Low A3

Consistently Low Ba1

Consistently Low Baa2

Franchise Buyer Demand

High

High

High

High

High

High (LR)

Low

Low

Low

Low

Kerrigan Advisors Franchises Analysis - Luxury


Moody's Credit Rating






Consistently High (LR) Ba2

Consistently Low A1

Consistently Low A3

Consistently Low Ba1

Consistently Low Baa2

Domestic53

32%

Import Luxury29

18%

Import Non-Luxury83

50%


Over 80% of Franchises Acquired by New Entrants are Non-Luxury

Franchises Acquired by New Entrants

Non-Luxury Franchise Blue Sky Multiple

Source: Kerrigan Advisors Analysis and Automotive News

Toyota Honda Subaru Chevy Ford CJDR Buick/GMC

Nissan Hyundai Kia VW Mazda1

2

3

4

5

6

7

Kerr

igan

Adv

isor

s Bl

ue S

ky M

ultip

les

Kerrigan Advisors Non-Luxury Blue Sky Multiples – March 2016

Sales per Franchise

Toyota Honda Subaru Chevrolet Ford Chrysler Nissan Hyundai Kia VW Mazda GMC Buick

1,698

1,350 1,262

932 932 919 813 771 703

537 499 401

Market Share Change

Subaru Kia

Chrysler G

roupNiss

an

GMC Buick Ford

Hyundai

Toyota

Chevrolet

MazdaHonda

VW

7%

2% 2% 1% 1%

(0%) (1%) (1%) (1%) (1%)(3%)

(10%)

Franchise Buyer Demand

High

High

High

Increasing

Increasing

Average

Average

Average

Average

Average

Low

Low

Sales Per Franchise

1,698

1,350

932

703

771

932

401

1,262

919

813

537

499

Market Share Change FY 2015

vs FY 2014

-1%

-3%

+7%

-1%

-0%

+2%

+1%

+1%

-1%

+2%

-10%

-1%




Variable NA

Variable Ba1

Variable Baa3

Variable B1

Variable Ba1

Variable A3

Variable Baa1

Variable Baa1

Consistently Low A2

Consistently Low NA

Kerrigan Advisors Franchise Analysis – Non Luxury


Moody's Credit Rating



Variable NA

Variable Ba1

Variable Baa3

Variable B1

Variable Ba1

Variable A3

Variable Baa1

Variable Baa1

Consistently Low A2

Consistently Low NA

75.6m 54m

76.6 m

Share of New Light Vehicle Buyers by Age

Source: JD Power, Wall Street Journal

* Through Nov

Millennials14-34

Gen-Xers35-47

Boomers48-66

Matures67+

Population Size

76.6 m39.9m

Millennials – The Future of Auto Retail Growth

Delicate Balancing

Act

Sam Swope Auto GroupSold December 10, 2015

ToAMSI

Renton KiaSold December 9, 2015

ToCarPros

Lexus of GlendaleSold July 21, 2015

ToKDW Automotive, Inc.

Renton HondaSold December 9, 2015

ToAutoNation

David Morris Fine Cars Mercedes-Benz of Edmonton West

Sold November 1, 2015To

McManes Auto Group

15 Dealerships Sold in 2015

Business

Texas Auto Dealers Association 2016 - Kerrigan Advisors