Lithia's acquisition of Pfaff a sign that Canada presents opportunities for U.S. groups

Lithia Motors Inc.'s expansion to Canada last week positions other U.S. dealership groups to follow the rapidly growing megadealer north.

The second-largest dealership group in the U.S. acquired Canadian retailer Pfaff Automotive Partners on Aug. 30, giving Lithia its first international outposts, with stores in Toronto and Vancouver. Lithia CEO Bryan DeBoer had previously described Canada as the group's "No.1 target."

And some of Lithia's U.S. competitors already appear to be looking across the border.

Farid Ahmad, CEO of Dealer Solutions Mergers and Acquisitions, a large dealership buy-sell advisory firm in Canada, said other U.S.-based public retailers have made inquiries to his firm about dealership groups in Canada that may be available to buy.

"We're working with three other publicly traded groups in the United States looking for opportunities for them in Canada," said Ahmad, declining to name the retailers.

Other Canadian auto retail experts also expect more interest in the market from U.S. retailers.

"If, in fact, Lithia comes here, that will be just the start," Michael Lewicki, president of buy-sell company Lewicki Automotive Consulting in Toronto, told Automotive News Canada before the Lithia-Pfaff deal was announced. "There will be at least a handful of other American consolidators that come north of the border, whether it be to Vancouver, Calgary, Toronto [or] Montreal."

Colin Richardson, principal at Omni-Channel Automotive Solutions in Toronto, told Automotive News Canada in late July that large U.S. groups likely see Canada as a market with a lot of upside. Digital retailing in Canada is viewed as less sophisticated and less comprehensive than what's offered by U.S. companies, he said. That would give U.S. players an advantage over Canadian competitors right from the start, especially given their easier access to capital.

Lithia's Pfaff acquisition was for 11 franchised dealerships representing mass-market, luxury and exotic brands ranging from Mini and Subaru to BMW, Porsche and McLaren. The deal also included a used-only store as well as a leasing business operating in Toronto, Vancouver and Calgary.

The owners of the Canadian group are retaining an undisclosed equity stake in the operation, though a Pfaff spokesman declined to disclose the percentage. Pfaff's Mercedes-Benz and Harley-Davidson outlets were not included in the transaction.

Lithia said the deal will add more than $1 billion in annualized revenue to its business. Lithia overall forecasts that it will add $5.9 billion in annualized revenue through acquisitions in 2021.

Lithia executives declined to comment last week. DeBoer in a statement called Pfaff "a perfect partner" and "the perfect hub for our future growth in Canada." The foothold Pfaff provides "will be valuable as we continue to grow throughout North America," he said.

Ryan Kerrigan, managing director for sell-side firm Kerrigan Advisors in Irvine, Calif., called the Pfaff acquisition a big play for Lithia.

Lithia will "try to build on this momentum and continue to do deals in Canada," Kerrigan said. "And I certainly don't see them taking their foot off the gas pedal here in the U.S."

Indeed, Lithia has made it clear that it will continue to add U.S. dealerships, targeting a goal of 500 stores, nearly double its current count of 263. DeBoer also has expressed interest in expanding to the United Kingdom and Australia.

"Those are a little less relevant at today's date," DeBoer said in July. "Those are probably two to five years out, kind of where Canada was a few years ago."

For U.S. dealership groups, Canada may present opportunities particularly in used-vehicle and digital sales.

Publicly traded used-car retailers such as CarMax and Carvana, which have provided stiff competition for U.S. dealership groups, don't operate in Canada.

And the cost of doing business is perceived as generally lower for a dealer in Canada than in the U.S., Richardson said.

Lithia and other U.S. groups will see benefits in purchasing underperforming groups, especially those yet to fully embrace digital retail, Richardson said.

Larger groups could take the underperformers and make them more efficient and therefore more valuable.

"There's more upside and opportunity with those particular groups," Richardson said.