Why Warren Buffett Spent $3 billion to Acquire Van Tuyl Car Dealerships
The news that Warren Buffett was entering the car business came out of left field and lit up the industry in discussion. Warren Buffett’s Berkshire Hathaway is a marquee name and he’s a legendary investor. Having the addition of this big player in the auto industry lends credibility and his single entrance helped public auto companies stock pop up.
According to Forbes the purchase price for Van Tuyl Group is estimated at $3 billion based on the multiples of public companies like AutoNation and Lithia motors. Van Tuyl Group has 78 dealerships in Arizona, California, Florida, Georgia, Illinois, Indiana, Missouri, Nebraska, New Mexico and Texas producing nearly $8 billion in sales in 2013 according to Automotive News. They sold 260,000 cars! Impressive stuff.
Where does that rank them for car dealership groups? According to Ward’s Mega Dealer 100 list, 6th. Ranked behind AutoNation at #1, Penske Automotive Group, Carmax, Sonic Automotive and Group 1 Automotive. Hendrick Automotive Group and Asbury Automotive Group follow closely behind. Presumably the company will stay private, but if they were to go public they would be ranked 4th in terms of market cap with CarMax #1 at $9.82 billion, AutoNation at $6.08 billion and Penske at $3.7 billion.
What got Mr. Buffett excited about this purchase? Several things, but take a look at their body shop revenue in that Ward’s list. It is 2x higher than groups that are twice as big! Why is that key? Marcus Lemonis from Camping World and CNBC The Profit breaks it down nicely in this video:
In the fixed operations: with the service, parts and collision repair revenue they are going to be able to pay all their bills. You’ll see most of their fixed costs being taken care of by their fixed operations and anything above and beyond that is pure profit. In this area Van Tuyl is outperforming EVERYONE by a big margin. Not only do they have great new and used car revenue, but great fleet sales, wholesale, F&I, service, body shop, parts & accessories revenue. They are solid, big player operators.
Of course a great return on equity doesn’t hurt either. According to a March article in Automotive News “In 2013, the average U.S. dealership produced return on equity of 29 percent, according to the National Automobile Dealers Association. That figure has risen in four of the past five years and is now more than double the 12 percent return recorded in 2008 when U.S. vehicle sales collapsed.”
Where Else Can They Make Money?
Economy of scale – It is expensive to sell cars. Combining fixed costs and volume discounts will allow more profit as a total group.
Financing – can be scaled and even profits can be used as zero interest loans and then leveraged.
Geico – Buyers need insurance. So, enter Geico! One of Buffett’s other businesses. A perfect place to cross-promote and offer buyers great discounts on car insurance.
Acquisition – a strong capital partner with plenty of cash, $55.5 billion at last count! Any dealership that fits within their criteria can be bought. Expect bidding wars to begin and acquisition to heat up over the next few years baring an economic pullback.
It’s an exciting time to be in the car dealership business with average sales up and total dealerships down according to this Wall Street Journal graphic.