The DEAL
LMP Motors’ announced acquisition of John Staluppi’s Atlantic Auto Group has captivated our clients and relationships. Staluppi is one of the country’s most highly regarded car dealers and is known for his business acumen. By our estimates LMP is paying somewhere beyond 10 times blue sky based on $38 million of Atlantic’s contribution to LMP’s projected 2021 net earnings.
Here are the terms. Staluppi is selling 70% of his empire for $425 million. Dealership real estate will be leased with an option to buy. Staluppi will receive $375 million in cash and a note for the remaining $50 million. (The terms have not been made public.) The requisite funds will be raised by some combination of a debt instrument and most likely a secondary stock offering. That’s in addition to the $60 million plus needed to close previously announced acquisitions. On its investor call last week, LMP’s Chairman Sam Tawfik said he has received several financing proposals from OPM’s and banks but has yet to decide what path to follow.
In their acquisition announcement LMP had this to say:
“Upon closing and combined with our currently contracted acquisitions, LMP’s revenues are expected to exceed $2.2B on an annualized basis in 2021, with approximately $70M in pre-tax income and expected net income of $4.59 per share, which would likely make LMP a newcomer to the Fortune 1000 list of companies with over 1,600 employees.”
Who is LMP Motors?
LMP raised a little less than $20 million at $5 per share by a microcap IPO last December. At the time of the offering LMP owned a used car lot in Florida and at best was marginally profitable. Employees total 30. As this is written, LMP’s stock price had risen to $35 per share on 9.9 million shares outstanding. That values the company at over $340 million. LMP just published a press release in advance of third quarter results. They announced that revenue for the quarter would be $13.1 million and gross margin would be $1.1 million.
Huizenga Redux
Back in the mid 90’s a total outsider, Wayne Huizenga, shocked the dealer world with the formation of AutoNation. He saw an arbitrage opportunity for the acquisition of car dealerships in a grand “roll up” scheme or industry consolidation. He recognized that dealerships were cash-flowing vessels, and the private market was undervaluing them. He could pay a substantial premium by using highly valued publicly traded stock as currency. In short, he backed AutoNation into a dormant public company to use their stock as payment for dealership acquisitions.
Although in the beginning AN had no earnings, he pitched investors with a then novel “cradle to grave” scheme. New car dealerships, standalone used car super lots, rental fleets like National Car Rental. Succinctly, the trick was to buy as much earnings as possible to support AN’s stock price (as high as $50 share) because eventually the story would get old. Earnings were needed to support the stock price.
Now we have another visionary newcomer in Sam Tawfik. Although starting modestly, LMP has big plans and sounds awfully like Huizenga’s blueprint. It’s paying substantial premiums for good profitable dealerships largely because cheap debt and a flourishing stock market can make it all happen.
Like Huizenga, Tawfik promises to revolutionize the industry by being the hybrid between Carvana and Lithia. New car sales, subscriptions, used cars and internet sales and more. Their publications use this eerily familiar tag line “BUY, SUBSCRIBE, SELL AND REPEAT”. By consolidating he is going to realize economies of scale. Beyond that, he is developing proprietary e-commerce programs to integrate all aspects of dealership operations and further cut costs. This is from their October 12th press release announcing the Atlantic deal:
“(We will) roll out e-commerce home delivery, site-to-store, and ship-from-store delivery strategies for our customers and demonstrate the value of our e-commerce hybrid model at the growing list of auto dealerships we intend to acquire. We believe LMP’s e-commerce sales and subscription and technology overlayed at these dealerships will continue to demonstrate the value of our hybrid model. Upon closing, and combined with our currently contracted acquisitions, in 2021 we expect to have over 9,000 vehicles exposed and available nationwide on our online platform and app for our customers with a cost-efficient transportation and delivery network that we will begin to integrate and add to inventories shortly after close.”
The Plan
When discussing the financing of acquisitions much like the original consolidators such as Group One and Asbury, the legacy dealer like Staluppi will continue to retain ownership in the 20% to 30% range and continue to manage their dealerships. The remainder then will be financed by seller financing like the Staluppi note, cheap debt plus a potential stock secondary offering. Makes sense. Profits from the acquired dealerships will then be able to repay the debt. We’ve argued for years that the public companies typically under pay for car dealerships. (Obviously not true for Asbury’s acquisition of Park Place in Texas.)
The Atlantic acquisition brings to 33 dealerships including 2 Lexus and 5 Toyota dealerships, now under contract. LMP expects all will close by January 2021. On the call LMP said that they had contacted the manufacturers already and were assured of an expedited approval, and were welcomed with the promise of more deals sent their way. They also mentioned that one Wall Street source has already opined that they were the “best of breed”.
In their press release LMP suggested that they have a pipeline of deals and expect to add 30 to 40 more dealerships in 2021. Assuming that they are able to make those acquisitions and add to those now under contract, they predict as much as $11.50 per share in annualized net income or $138 million. That compares to Asbury which earned $157 million trailing twelve months and enjoys a $116 per share stock price as of today.
Conclusion
We’ve seen this movie before. Huizenga did it when the opportunity and the markets cooperated. We must acknowledge there are a lot of hurdles ahead. But in the time of $200 million SPAC’s with no earnings and no business at all and Carvana’s $37 billion market cap, who’s to say this can’t work?
What does this mean to you?
Newcomer LMP’s aggressive growth plan highlights the frothy state of the market. Historically low interest rates and a skyrocketing stock market support high prices for good assets including vehicle dealerships. Wall Street and others have finally recognized just how valuable car dealerships are. On the other hand, car dealers might want to consider recapitalizing their balance sheet with inexpensive debt or even leveraging your real estate.
Bel Air’s founding partner was responsible for the first IPO in the dealer world. We’ve been engaged by billion-dollar private equity funds seeking entrance into the business. We have been responsible for dozens of buy sells and dealership valuations. Contact us to explore how we can bring our expertise to your goals.