Buffett to Buy Van Tuyl, Create Berkshire Auto Unit

Warren Buffett
Warren Buffett told CNBC, “I fully expect we’ll buy a lot more dealerships over time.” Photographer: Jeff Kowalsky/Bloomberg

Warren Buffett’s Berkshire Hathaway Inc. agreed to buy Van Tuyl Group, the largest privately owned U.S. auto dealer, in a bet that the industry will consolidate.

The business will be renamed Berkshire Hathaway Automotive and continue to be run by Larry Van Tuyl, Omaha, Nebraska-based Berkshire said today in a statement that didn’t disclose terms. The target company has more than $8 billion of revenue.

“I fully expect we’ll buy a lot more dealerships,” Buffett told CNBC today. “We’ve gone a long time without getting into automobiles, but Larry’s got an operation that we think could be scaled up a lot from where it is.”

Buffett, 84, has been drawn to businesses that have opportunities to expand through acquisitions. Such bolt-on purchases allow his deputies to deploy part of Berkshire’s cash pile, which was more than $55 billion as of June 30, and free his time for larger deals.

Over the last two decades, the car dealership industry has consolidated as some businesses closed and companies like AutoNation Inc. and Penske Automotive Group Inc. built their networks. That trend is poised to continue, said Tim Lamb, president of Tim Lamb Group LLC, a dealership brokerage company in Granville, Ohio.

“Fewer guys are going to have more rooftops,” he said. “It’s a very small portion of the dealer body that’s owned by these large groups. There’s still a whole bunch of opportunity to accumulate.”

Van Tuyl operates 78 dealerships in states including Texas, Arizona, Florida and California, and sells vehicles from automakers including Toyota Motor Corp., Ford Motor Co. and General Motors Co.

‘Very Lucrative’

“The Van Tuyl business model is to run large, high-volume stores in Sun Belt markets,” Alan Haig, president of Haig Partners LLC, a dealership brokerage company, said in a phone interview. “That is a very lucrative business model because the return on sales increases with higher volume.”

Haig estimates that Van Tuyl is valued at more than Group 1 Automotive Inc., which has a market capitalization of $1.8 billion, and less than Penske, which has a value of $3.7 billion.

AutoNation, the largest new-vehicle retailer in the U.S., had about double the annual revenue of Van Tuyl last year and is valued at more than $6 billion after climbing 6.1 percent in New York trading today.

Rising Sales

The auto industry showed its health in September results, as the annualized U.S. sales rate, adjusted for seasonal trends, exceeded 16 million for the seventh straight month. SUV and crossover utility vehicle sales rose 17 percent in September, outpacing the industry’s 9.4 percent gain, according to researcher Autodata Corp.

Even though Berkshire is new to the dealership business, the company disclosed an equity stake in Detroit-based GM in 2012. The holding is valued at more than $1 billion.

While most Berkshire units retained their names after being acquired, some have taken on the parent company’s brand. The utility business changed to Berkshire Hathaway Energy this year, and Buffett’s company recently introduced the Berkshire Hathaway HomeServices name for its residential real estate franchise network.

Extending the use of the Berkshire name will attract customers who view the company positively, Keefe Bruyette & Woods analysts led by Meyer Shields wrote in a note to clients today. The move “also complicates expectations, which we don’t share, of a post-Buffett Berkshire Hathaway breakup.”

Management Retained

Even though the dealership business will bear Berkshire’s name, its management and culture will remain intact, said Jeff Rachor, who will become CEO.

Five years from now, the “only difference is that we’ll be a lot larger,” he said in a phone interview. “From a standpoint of culture and philosophy and business model, it will look very similar to what it looks like today.”

The deal is expected to be completed in the first quarter of next year, according to the statement. Stephens Inc. was Van Tuyl’s banker and DLA Piper is providing legal advice to the dealership group. Munger, Tolles & Olson LLP is Berkshire’s law firm on the deal.

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