LIFE IN THE CASH LANE

Alberta Venture - - Marketing Matters - BY ROB­BIE JEF­FERY

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

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