Pub. 57 2016-2017 Issue 2

36 Chart IX Public Auto Dealership Group Capital Allocation through the 3rd Quarter 2016 in Millions Source: SEC Filings for AutoNation, Penske, Group 1, Asbury, Sonic, and Lithia Public Acquisition Activity Private dealership groups continue to represent the larg- est share of dealership acquirers and are expected to do so for the foreseeable future. For the purpose of this report, it should be noted that Kerrigan Advisors is categorizing 2015’s new entrants as private buyers. There were fewer new entrants in 2016, relative to 2015. This may be due to the much publicized industry sales plateau. Increasingly, private investors, including family offices and private equity, are backing existing dealers rather than mak- ing direct acquisitions on their own. An example of such a structure is the investment by Soros Fund Management into the McLarty Automotive Group, founded by Mark McLarty. With this structure, these investors provide growth capital for expansion to an experienced dealer. The dealer usually retains control and managerial responsibility, with the added benefit of an equity partner who can assist with acquisition underwriting and who is eager to deploy equity capital into auto retail. Kerrigan Advisors expects to see more dealers take on equity partners as a source of growth capital. These investors can also have the added advantage of becoming strategic thought-partners in assess- ing growth strategies in a changing auto retail landscape. Chart X Percentage of Dealership Franchise Acquisitions (Private versus Public) – First 9 Months 2016 Source: The Banks Report and Kerrigan Advisors research Note: If a transaction includes multiple franchises, each franchise is counted in this analysis. Private buyers are the driving force of the buy/ sell market. Increasingly, private buyers are taking on private equity and family office investors to help fund their growth strategies. THIRDQUARTERBUY/SELLTRENDS Buy/sell activity remained strong in the first nine months of 2016, though lower than 2015. The reduction in activity was in large part due to the decline in public acquisition spend- ing in the US. Kerrigan Advisors had expected the pace of acquisition activity to increase in the second half of 2016; however, with the forthcoming Trump Administration, this is less likely. By contrast to prior years when sellers were eager to close their transactions by the end of the calendar year, today’s seller are now motivated to push their closing to 2017 with the hope of higher after-tax sales proceeds as a result of a more favorable tax code. Kerrigan Advisors continues to see transaction sizes rise and multi-dealership groups come to market at an increas- ing pace, as noted in our prior report. The firm sold two of the top 100 dealership groups, Sam Swope Auto Group Public 52 Franchises 16% Private 274 Franchises 84% Stock Buyback $1,143 35% Dividends $110 3% Capex $799 24% Non- Dealership Acquisition $521 16% Foreign Acquisition $163 5% Domestic Acquisition $578 17% “There is no question that our move into the Premier Truck Freightliner retail business was driven because of some of the multiples and goodwill requirements we had on the auto side and as we grow to the size we are, it’s tougher and tougher to find good acquisitions at reasonable prices.” Roger Penske, Chairman and CEO, Penske Automotive – 3rd Quarter Earnings C