After a prolonged period of unprecedented activity, mergers and acquisitions in automotive retailing have slowed, and valuations and profits have cooled compared with the preceding go-go years. Nonetheless, the market remains active despite some challenges, particularly high interest rates. As retailers face these economic uncertainties, questions abound: Is it still a good time to buy or sell a dealership? Will the lag in consumer interest in electric vehicles have any impact? And what about the looming shadow of a shift to an agency model of auto retailing? For some insights, Automotive News Canada reached out to Farid Ahmad, the founder and CEO of Dealer Solutions Mergers and Acquisitions (DSMA).
Q: Is the year ahead shaping up to be a buyer’s or seller’s market in mergers and acquisitions? What are the headwinds that might affect M&A activity?
Farid Ahmad: All our data points to 2024 being the most balanced year yet for buyers and sellers. In more than a decade of matching both parties and more than 425 transactions later, I don’t think we have ever seen anything like this. Economic factors such as rising interest rates, goodwill numbers declining 11% and the early-year instability amongst U.S. banks have made this year a peculiar one. But the market remains active despite the looming uncertainties. Large automotive groups continue to expand, and dealers continue on their roads to retirement. They may change the way they sell their legacy, but they’re selling it nonetheless.
Q: Nearly four years ago, restrictions imposed by the pandemic shrank inventories, and dealership profits soared. Now inventories are recovering, and dealership profits are slipping. Have dealers missed their window to sell? Or conversely, is this an even better time to buy?
Ahmad: Inflated inventories and rising interest rates have most definitely had a negative impact on dealership profitability across North America. Brands such as Stellantis have suffered more than others due to growing unsold inventories, and we unfortunately cannot put this behind us quite yet. Indeed, as manufacturers get back on the production line and interest rates remain high, we are predicting this trend will continue in 2024. The question is, how much will interest rates and the current state of the economy affect buyers’ decisions to buy or lease vehicles?
Q: The electrification era will require retailers to invest in their operations. But at the same time, the transition from internal-combustion-engine (ICE) vehicles to electric vehicles (EVs) seems to be slowing. What impact will this uncertainty have on the pace of M&A activity?
Ahmad: There most definitely are concerns that EVs will weaken business valuations in the coming years, making many dealers wonder if they should sell sooner rather than later. However, the global movement for a permanent switch to EVs is not slowing down.
I noticed that this growing demand from OEMs to push EV sales has worried a large number of dealers, as North America is not quite prepared to service them yet. Customers are also wary due to a lack of functioning charging stations, pricier models and range anxiety, so they keep choosing ICE vehicles over electric models. On the other hand, OEMs are pressuring dealers to fill their lots with their latest EVs, which is creating a concerning imbalance.
The growing buildup of EV inventory in many U.S. Ford dealerships has been staggering to see, and I expect to see a lot more in the coming months.
On a lighter note, we at DSMA have been representing Vicinity Motor Corp., one of the only commercial Class 3 and 5 truck manufacturers in the EV world with inventory currently on the ground. As we seek more potential dealer partnerships, we have been pleasantly surprised at the level of interest. As prices are increasing across the board, trucking and transportation need the most attention in terms of cutting costs – and this is where we come in. So, depending on the product, I see a mix of reluctance and hopeful anticipation.