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L.A. buy pushes Lithia to 4th in nation

It didn't take long for Lithia Motors to invest a hefty chunk of the $300 million raised in a senior note offering earlier this summer.

In one of the nation's largest dealership transactions of the year, the Medford auto retailer acquired Downtown Los Angeles Auto Group's Audi, Mercedes-Benz, Nissan, Porsche, Toyota and Volkswagen franchises, and a Nissan store in nearby Carson.

The deal follows the pattern of recent purchases Lithia calls "strategic partnerships," acquiring long-standing operations from owners ready to move on, while retaining management.

"From our standpoint, it's a brand consumers have identified with since 1955," Lithia Motors President and CEO  Bryan DeBoer said. "Why would you change something embedded in consumers' minds for 60 years? Rather than imprinting ourselves in the areas, we would rather think about what the team and consumers really need."

Lithia ranks No. 4 in the Automotive News list of dealerships, with annual new-vehicle retail sales of 145,772.

Erin Kerrigan, managing director of Kerrigan Advisors in Irvine, Calif., told Automotive News Lithia could jump past Group 1 Automotive of Houston to No. 3 on the list by the end of year, if it maintains its present pace.

Lithia's great leap forward began with the purchase of DCH Auto Group in October 2014 and has been punctuated by three substantial buys in the past 12 months.

Lithia paid $364 million in cash for DCH, which had 27 stores in New York, New Jersey and Southern California. The company also issued 268,770 shares in stock, incurred $230 million of vehicle floor-plan debt financing and assumed non-floor-plan debt of $53 million.

Last September, Lithia purchased nine stores from Carbone Auto Group in upstate New York. Then in May, the company paid $90.2 million, including $88.1 million cash, for Baierl Auto Group in the Pittsburgh area.

Terms weren't disclosed in the Downtown L.A. Auto Group purchase, but DeBoer said it was close to half the size of the DCH purchase — with growth potential every bit as large.

As often is the case, succession issues opened the door.

The auto group was part of the Shammas Group, founded by Nick and Jeanette Shammas, who moved from the used car trade to a dealership in 1955 with the purchase of Felix Chevrolet near the University of Southern California campus. Over the years, they added dealerships along Interstate 10. Nick Shammas died in 2003, and Jeanette in 2014. Their daughters, Diane Shammas and Carole Shammas, began considering their options. Darryl Holter, Carole Shammas' husband, is CEO of the Shammas Group and will oversee Felix Chevrolet, which was not part of the deal.

Kerrigan, who served as Shammas Group's adviser, got the ball rolling when she called DeBoer early this year.

“Our client was particularly attracted to Lithia’s business model, which in effect maintains the group’s culture and management team while providing them with the benefits of additional scale resulting from Lithia’s size and breadth as an organization,” Kerrigan told Auto News.

"The sisters are academics, who enjoyed the business," DeBoer said. "But were also at a point in life when they wanted to do other things."

He said acquisitions can take years to develop as franchises are scouted, demographics reviewed and present ownership evaluated to determine whether they're a fit. Rather than reorganize operations, as was the case years ago, Lithia seeks well-run dealerships needing small tweaks.

"Our model is to help add value to brand that's already been developed and develop the teams that are in place," DeBoer said. "The places we've bought have done a lot of good things in their marketplace, but maybe they need a little fine-tuning, sharing of best practices and technological advances that make them a little more attractive to consumers."

Lithia expects the acquisitions to produce $1 billion in annual revenue and 55 cents in per-share earnings.

“These stores are located in the fast-growing downtown area, within close proximity to the Staples Center and L.A. Live, and are among the largest volume stores of their brands in the nation,” DeBoer said.

Chief Operations Officer Elay Sung, who has been with the company more than 20 years, will run the group, which employs more than 800, and become a Lithia vice president.

  — Reach reporter Greg Stiles at 541-776-4463 or business@mailtribune.com. Follow him on Twitter at www.twitter.com/GregMTBusiness, and on Facebook at www.facebook.com/greg.stiles.31.