LIFE IN THE CASH LANE
In 2014, AutoCanada made a killing via acquisitions, only to find auto sales nosedive in its biggest market in 2015. But the lull allows it to make some upgrades before kicking it into high gear again
It’s just two days before AutoCanada releases its third-quarter results for 2015, so Patrick Priestner is at the tail end of a media embargo and is cherry-picking his words. The 60-yearold executive chair and dyed-in-the-wool car salesman admits that 2015 is the plateau of a decade-long ascent for AutoCanada, a run in which it went from IPO to the Goliath of Canadian auto dealerships. In step with oil prices this year, vehicle sales nosedived more than 15 per cent in Alberta, where almost half of his company’s sales occur. “I’m preparing AutoCanada for a couple years of it,” he says, sighing. But the results will show another side, too: Priestner has always had an appetite for acquisitions, which has been AutoCanada’s ticket to high earnings since it went public in 2006. And now, in a buyer’s market, AutoCanada is preparing to reap the rewards like it did in 2014.
Priestner began his career in auto sales when he was 17, leaving the University of Calgary to save money after a year studying philosophy. He started as a “lot boy,” washing and moving cars, and by 1975 was a number-one salesman in Alberta. Soon, Priestner and two friends each pitched in $8,000 to buy their first dealership. “The manufacturer put in about $200,000 and we financed the rest,” he says. He kept going. Stints as sales manager, GM and later, dealer principal, found him in Taber, London, Ontario, and then Edmonton, where he became president of Canada One Auto Group in 1993 and eventually founded AutoCanada.
From 2006 to 2013, the country’s only publicly traded auto dealership group grew from 14 stores to 32, and kept growing. Priestner has to stop for a moment before saying how many it has today. “Fifty-two, I think,” he says. (It owns 60 if you count brands like Fiat and Mini separately.) AutoCanada sold 52,147 new and used units in 2014, and by year-end had brought in $2.2 billion in revenue, up from $1.4 billion the year prior. It was a 57.2 per cent jump, compared to the 27 per cent increase in revenue from 2012 to 2013. Investors touted AutoCanada stock as a definite hold, of the get-it-before-it’s-gone type, or, as The Globe and Mail tagged it, “one of the year’s hottest stocks.”
Canadian auto sales have long been the domain of independent or family-run businesses. Of the 3,500 dealerships in Canada, private groups own about half. There’s a reason why billionaires like Warren Buffet and Bill Gates invest in dealerships: The industry will inevitably consolidate even further. Consolidation arrived later in Canada than the rest of the developed world, and Priestner believes that positions AutoCanada to secure an even larger market share.
For one, more groups and fewer people are buying dealerships. In 2013, dealer groups sold 64 per cent of new vehicles in Canada. Fewer children want to take over the family lot, in part because manufacturers require performance programs and longer trial periods; in part because it’s wildly expensive. An average dealership that sold 1,000 new vehicles a year used to cost about $1 million, Priestner says. “You wake up 10 or 20 years later and the cost of buying that same dealership is probably in the $10-million to $12-million range, plus real estate, and the factories no longer finance any of that.” He adds that the average age of a dealership owner is 60. PricewaterhouseCoopers conducted a survey claiming 50 per cent of them will sell within five years. Priestner also suspects that many of the dealer groups are looking for an exit strategy, and predicts that at least 10 per cent of them will sell in the next few years. “I think on the acquisitions side, it’s going to pick up steam in the next two to five years,” Priestner says. “I think this will be the biggest turnover in history.”
Even if those numbers are inflated, there’s a staggering opportunity: More dealerships will go up for sale, and they’ll need someone to run them. Why not AutoCanada?
Well, this is where it gets a bit complicated. While AutoCanada owns dealerships from 18 major automakers, there are holdouts. Toyota, Ford and Honda won’t sell dealerships to publicly traded Canadian companies, so Priestner buys the stores himself.
“Effectively, the stores that Pat owns privately have AutoCanada management in them,” says CFO Christopher Burrows. “We make the data and operating decisions and we run those dealerships and that allows us to have a first-hand demonstration of our capabilities for those manufacturers. Despite who owns it, they know AutoCanada is running the store.” The ultimate goal, he says, is that “at some point we have them change their minds and allow us to own their stores directly.” It’s a sticking point for some, who think AutoCanada purchasing assets owned by the executive chair is a potential conflict of interest. But if inflated numbers is their concern, it seems quaint when stacked beside AutoCanada’s undeniable ballooning revenues over the last decade.
That’s not to diminish the trials of 2015. Forty per cent of Albertans are deferring major purchases because of the downturn, and it shows in AutoCanada’s share price, which in September was down 70 per cent from June 2014. Analysts estimate that AutoCanada will generate a per-share profit of $1.90 for 2015, down from $2.30 last year.
Still, that’s higher than 2013 earnings, and Priestner isn’t losing faith in Alberta; some of its 2015 purchases are in cities like Spruce Grove. Priestner is preparing by redoubling efforts to raise same-store revenue, and while “this is the first year we’ve been poor in same-store [revenue] in probably 10 years,” he says, AutoCanada is proving that its model works by boosting numbers in its recent acquisitions.
“In Alberta, we have some stores that are up, and some that are down,” says Burrows. Investors might like to see more investment in other provinces – in B.C., for example, vehicle sales actually increased by nine per cent this year – and AutoCanada did make its first acquisition in Ottawa this year. But Priestner knows the market better than anyone else and has his eye on oil country. “I’m a long-term thinker,” he says, “and Alberta’s been the best place to retail cars for 19 of the last 20 years.”
“I think on the acquisitions side, it’s going to pick up steam in the next two to five years. I think this will be the biggest turnover in history.”
– Patrick Priestner