Canadian retailers go south for deals

Steele Auto Group, with 49 stores in Atlantic Canada, wants to grow fast, so it's investing south of the border.

Steele, of Dartmouth, Nova Scotia, some 150 miles east of Maine, entered the United States in 2020 with three domestic brand stores in small Texas towns. This month, it added two Hyundai dealerships between San Antonio and Austin, where CEO Rob Steele has a vacation home.

With an eye to double its sales and profits in three to five years, the fast-growing company is just getting started making acquisitions in the United States, President Kim Day told Automotive News.

"Our highest growth opportunity is in the United States," she said. "We're very interested, of course, in growing our presence in that Texas market. We're also really interested in opportunities in Florida [and] even closer to home ... in the New England states."

Steele is one of several Canadian dealership groups that have a footprint in the United States and want to grow it. Many are flush with cash after two years of soaring profits, and they see a market to the south where the weather is warmer, dealers have strong franchise protections and prices are often lower than in Canada, particularly for stores in rural locations, dealership buy-sell brokers said.

Bigger groups, in particular, looking to grow and diversify their portfolios are finding opportunities in the United States, said Gordie Gerbrandt, Canadian director in Edmonton, Alberta, for Tim Lamb Group, a buy-sell advisory firm in Columbus, Ohio. Tim Lamb expanded to the country in 2019.

Getting a break from Canada's stricter COVID-19 policies doesn't hurt, either, Gerbrandt said.

"Canadian dealers look at a place like Texas that's got an attractive tax rate; they've got a laid-back government that doesn't impose these massive restrictions on dealers, and so they can kind of continue to do business," he said. "So that really triggered them."

Several Canadian groups have made U.S. inroads in the past year or have expanded store counts here.

Braeden Mueller, vice president of western Canada's Knight Automotive Group, wanted to ensure his group's first U.S. acquisition was high-performing.

After looking for three to four years, Knight Automotive entered the United States in December, he said, buying two Ford dealerships near Los Angeles.

With about 39 million people, California has more potential car-buyers than all of Canada, which has about 37 million citizens.

"Naturally, [if] you're going to have the most people, you're going to have the most car dealerships," Mueller said. "It's hard to get that scale in Canada."

Public auto retailer AutoCanada Inc., of Edmonton, has a U.S. presence with its Leader Automotive Group in Illinois. In November, AutoCanada bought a Stellantis dealership in Crystal Lake, Ill., and now has 10 rooftops, including some with numerous franchises, in the state.

Rafih Auto Group, of Windsor, Ontario, bought four Michigan dealerships last year, expanding its U.S. presence from Ohio.

The interest is not limited to dealership groups. Annie and Shea Brennan had been looking for a few years to buy a dealership in Atlantic Canada. Annie, whose father and grandfather were General Motors dealers, said she and her husband, Shea, opted to broaden their search into the United States and found a Buick-GMC store in Plattsburgh, N.Y., for sale and acquired it in December.

Canada is home to more than 3,200 franchised car and truck dealerships, according to the Canadian Automobile Dealers Association, while there were 16,658 dealerships in the United States in mid-2021, according to the National Automobile Dealers Association.

Some dealers and buy-sell experts believe mega U.S. retailer Lithia Motors Inc.'s entry into Canada last year, buying Pfaff Automotive Partners, with stores in Toronto and Vancouver, British Columbia, has made the Canadian buy-sell market more competitive. And some Canadian buyers may be looking south because of that.

Farid Ahmad, CEO of Dealer Solutions Mergers and Acquisitions, a dealership buy-sell advisory firm in Markham, Ontario, north of Toronto, echoed Gerbrandt's reasons for Canadian groups' interest in the United States He added that many Canadian banks that work with Canadian dealers are "more bullish about the U.S. market."

The warm and sunny climate in regions such as the Sun Belt also are a draw, Ahmad said.

"A lot of Canadians vacation in the United States," Ahmad said. "It really kills two birds with one stone. It allows them to buy a dealership in the Sun Belt that they can make money on while they can also vacation."

But some dealers such as Steve Chipman, president of Birchwood Automotive Group in Winnipeg, Manitoba, want to stay within a driveable distance of their Canadian operations.

Birchwood Automotive, with 21 stores in Canada, bought its first and only U.S. dealership in 2016. It put a "baby toe into the water of the U.S. market" with a small Chevrolet-Buick store not far across the border in Cavalier, N.D., Chipman said. He said he gets calls about once a month on U.S. dealership acquisition opportunities and is looking for the right fit in the northern Midwest.

Ahmad expects Canadian buyers — both with an existing U.S. footprint and newcomers — will remain active in the U.S. market in 2022.

"We're finding in our business that there's a real high level of interest now from even more organizations in Canada," Ahmad said. "We anticipate that this year will also be a year of a lot of Canadian-U.S. transactions."

Foundation Automotive Corp. could be one such player. It has 20 dealerships: Three in Canada and 17 spread across Colorado, North Dakota and Texas.

While Foundation has its headquarters in Calgary, Alberta, the group has a U.S. office in Houston, which is where CEO Kevin Kutschinski and most of its staff work.

Foundation bought two Hyundai dealerships in Colorado last year in separate transactions. It had aggressive plans to acquire more U.S. stores before the end of 2021, but those deals were delayed, Kutschinski said.

"The market had gotten so strong, there was so much deal activity, that a lot of the OEMs were unable to get a lot of the deals across the finish line by year end," Kutschinski told Automotive News.

Now, Foundation is primed to have a busy February and March.

This week, Foundation is expected to close on eight dealerships in North Texas, and in early March, it expects to buy a dealership in the Houston area before acquiring four dealerships in Tennessee later in the month, Kutschinski said.

Foundation is actively looking to acquire U.S. dealerships beyond its three pending transactions, but it likely won't expand its Canadian footprint in the near future.

"I love Canada, I'm Canadian," Kutschinski said. "I'm looking at kind of the political landscape of Canada and not really bullish on it. I would doubt that we'd look at buying stores in Canada for at least the next couple years."