What's the difference between Beenie Babies and publicly owned auto dealership stocks? Answer: The price of Beanie Babies haven't crashed yet. The revolution in public ownership of car dealerships seems to have fizzled almost before it started. After some initial investor euphoria on virtually every new entrant, each one has fallen from its high. The worst performer has been Car Max, which has lost 75% of its value since it went public in February 1997. Traditionalists in the industry are silently (or not so silently) gloating and muttering under their breath, "See, I told you so."
The core problem is that the original deals were vastly overpriced. Now they have come back to a fairer approximation of their value. The first IPO's (Initial Public Offerings) started a revolution in the distribution of automobiles. The problem is that the first soldiers in the war were raw recruits and couldn't shoot straight. It is fair to point out that the later dealership IPO's for more established organizations such as those for Lithia, Sonic and Group One, although down from their highs, have not fallen as catastrophically as the first few did. They were priced more realistically from the beginning.
Of course there are other factors at work here including the overall market and the trend away from public consolidation stories and "concept" stocks. It's no secret that the stock market has taken something of a breather from its five-year-long run. Were you aware, though, that the average NASDAQ stock has been down as much as 50% from its high of only a few months ago? The point is that the car stocks are not alone in their collapse.
Public car dealers are really part of a broader phenomenon of the consolidation of mature fragmented businesses. The story that got investors aroused was that efficiencies and economies of scale could be obtained by "rolling up" dozens of smaller businesses into one big one. Sound familiar? During the overheated market, public money was being virtually thrown at consolidation concepts where intention was to raise public money to finance the "roll up." Consequently, in this overheated environment, Car Max was able to sell 80% of the company for $427 million to the public for a total valuation of more than _ billion dollars. The original prospectus from February 1997 reveals that at the time it went public, Car Max had opened only a handful of stores and was losing hundreds of thousands.
Now, however, the always-fickle public investor has turned on the consolidation phenomena. More established roll up industries such as employee staffing companies and intra-city bus companies, to name a few, have been devastated. And central to our focus, Car Max has lost 75% of its value.
The point is that the first few dealership IPO's were for virtual start-ups priced unrealistically high. General Motors, Chrysler and Ford maintain multiples of earnings on average of about 10. Those first car dealer IPO's came out at multiples of earnings above 30. What's more, the first few companies were essentially formed at the IPO stage with no track record as consolidators or operators. That never made any sense, except maybe if they had been Internet companies.
It's not that the dealership stocks have fallen so far, but that investors greeted the first deals with irrational exuberance, to borrow a phrase from Mr. Greenspan. Now the public valuations are not substantially greater than the private valuation of dealerships. The hype is over and the stocks generally are priced in a range that makes them bargains in some cases or at least reasonable approximations of true value in others. Exuberance has given way to reality and the result is that these stocks are fairly priced if not cheap.
The implications are that the next round of IPO's will have to be priced much more in line with the manufacturers' multiples and those of the other now-pedestrian-valued public dealership stocks. Let's face it, investors aren't in blind love with this sector anymore. The gold rush is over. This is likely to have a chilling effect on future public deals, at least for the foreseeable future. The worth of publicly owned dealerships (the blue-sky value) will be commensurately reduced.
Sheldon Sandler is CEO and a founding partner of Bel Air Partners. Bel Air is a financial consulting and investment banking firm dedicated to the automotive sector generally and car dealers specifically. Bel Air advises its clients on capital market transactions including Initial Public Offerings, REITs, franchise loans, private placements, and mergers and acquisitions If you have specific questions or require more information about this subject, please check the appropriate box on the reader response form on page 3.#