Pub. 57 2016-2017 Issue 2

31 WINTER 2016 Among the franchises being acquired, “ROI” (return on investment) continues to be the biggest driver of buy/sell market share. Franchises that sell for lower blue sky mul- tiples provide higher ROI, while franchises that sell for higher blue sky multiples provide lower ROI. With this in mind, domestics continue to dominate the buy/sell market particularly as truck sales surge. Domestics saw their share of the buy/sell market increase from 37% in 2015 to 51% for the first nine months of 2016, while non-luxury imports saw their share of the buy/sell market decline from 43% in 2015 to 31% for the first nine months of 2016. Luxury import franchises command a disproportionate share of the buy/sell market, more than double their market share. However, Kerrigan Advisors expects that share to decline in 2017. Fewer buyers are seeking “trophy” luxury assets at any price, particularly in a declining luxury sales market (luxury sales are down 1% through October). Sell- ers of luxury import franchises seem to be moderating their pricing slightly; however, many will not consider a sale un- less they receive a multiple well above those published by Kerrigan Advisors. Luxury sellers seeking super premium multiples are often disappointed to find few buyers willing to price at these levels. Furthermore, buyers who are willing to pay steep premiums tend to have a riskier profile. They may make higher offers, but ultimately are unable to close, often because their leverage assumptions are too aggressive. Chart III Buy/Sell Market Share for the First 9 Months of 2016 Source: The Banks Report & Kerrigan Advisors Analysis Chart IV Franchise Market Share for the First 9 Months of 2016 Source: Automotive News and Kerrigan Advisors Analysis Domestic franchises saw their buy/sell market share in- crease substantially in the first 9 months of 2016. Buyers are attracted to the higher ROI associated with these franchises, relative to import franchises. With truck sales on the rise, domestic buy/sells will likely continue to rise into 2017. Public AcquisitionActivity The publics as a group reduced their acquisition spending in the US by 18% in the first nine months of 2016, as com- pared to 2015, with only AutoNation and Lithia making US dealership acquisitions this year. Chart V Public Auto Dealership Group US Acquisition Spending in Millions Source: SEC Filings for AutoNation, Penske, Group 1, Asbury, Sonic, and Lithia Note: This spending EXCLUDES Penske’s commercial truck acquisitions. $ in Millions Domestic 51% Import Luxury 19% Import Non-Luxury 30% Domestic 67% Import Luxury 9% Import Non - Luxury 24% $211 $504 $502 $659 $1,449 $832 $700 $572 2010 2011 2012 2013 2014 2015 9 Months 2015 9 Months 2016