Tenafly used car finance

Recently, two dealership groups announced their intention to offer shares to the public. [see "Going Public" on page 40.] The information available in connection with the public filings makes for some interesting comparisons.

I was bold enough, a few months ago, to identify four criteria for dealership success. These were Management, Capital, Location and Product. Let's see how United Auto Group and Cross-Continent Retailers stack up in these areas:

Management. United is headed by Carl Spielvogel, the 67-year-old former CEO of one of the world's largest marketing, advertising and communications companies, Bates Worldwide. The vice chairman, Marshall Cogan, is the CEO of Trace International Holdings, a company that held 38 percent of United's shares as of July 31, 1996. The executive vice presidents, Arthur Rawl and George Lawrence, are from a PVC pipe products manufacturer and an automobile dealer group, respectively. The vice presidents are an attorney and a financial executive. Five members of the eight-man Operating Committee are former executives of dealership organizations that have been acquired by United.

Cross-Continent Auto Retailers is chaired by Bill Gilliland, a 30-year dealer owner-operator. Robert Hall, an eight-year dealership financial executive, the senior vice chairman, is Gilliland's son-in-law. The vice chairman, Ezra Mager, is a former partner in a Wall Street investment firm, and was also a participant in the formation of United Auto Group. Cross-Continent's six vice presidents all have backgrounds in some segment of dealership management.

Capital. Since the purpose of public offerings is to raise capital, let's compare the intended use of the proceeds.

United does not provide an estimate of total proceeds, (We have since learned that United is seeking $150 million.) but indicates it will use $31 million to complete the acquisition of the Sun Group, which is planned to take place contemporaneously with the offering. Approximately $39 million will be used to repay debt. Another $5 million will repay revolving credit lines. It is anticipated that $15 million will go to expand the company's finance business. Remaining funds will be used for working capital.

Cross-Continent expects to raise about $45.1 million, and will use $13.5 million to acquire Lynn Hickey Dodge, an unspecified amount may be used to purchase some of the Hickey used car inventory. Approximately $25 million will be used to repay the majority of existing flooring loans. Remaining funds are designated to be working capital.

Location. United will be operating dealerships in New York (Nyack), Connecticut (Danbury and Watertown), New Jersey (Englewood, Jersey City, Tenafly and Toms River), Arkansas (Benton), Georgia (Duluth, Morrow and Chamblee) and Arizona (Phoenix and Scottsdale).

Cross-Continent operates in Texas (Amarillo) and Oklahoma (Oklahoma City). The proposed acquisition of Lynn Hickey Dodge will expand their Oklahoma City presence.

Product. The United franchises by state are: New York, Mitsubishi and Toyota; New Jersey, Jeep-Eagle, Hyundai, Oldsmobile, Toyota, BMW, Nissan, Chrysler-Plymouth, Chevrolet-Geo, Mitsubishi, Toyota and Lexus; Connecticut, Chevrolet-Geo, Hyundai, Isuzu, Saturn, Suzuki, Honda and Dodge; Arkansas, Chrysler-Plymouth, Dodge, GMC, Jeep-Eagle and Oldsmobile; Georgia, Toyota and Nissan. The franchises included in the proposed acquisition in Arizona include BMW, Land Rover, Acura, Audi, Aston Martin, Jaguar, Lexus and Porsche. The Cross-Continent franchises are largely Chrysler Corp. brands.

Other considerations. There is a clear difference in the philosophy of these two groups. United has spread its operations over several states and has included a variety of franchises. Cross-Continent, on the other hand, is aiming at domination of specific makes in target markets.

United's offering is a move by a number of Wall Street veterans to enter the automobile retailing arena. The Cross-Continent offering will enable a family-owned business to expand domination of selected markets.

Both registrants plan to use a portion of funds raised from the public to make acquisitions. United plans to acquire the Sun Group in Arizona for a reported $31 million. The data provided shows that the Sun Group has stockholders' equity of $3 million and profits of $2 million. Cross-Continent is going to use $13.5 million to acquire Lynn Hickey Dodge. Financial data provided for Hickey reveal stockholders' equity of $3.5 million and an annual income of $565,000.

Anyone who has participated in the recent purchase or sale of a dealership will conclude that the multiples to be paid by United and Cross-Continent represent an escalation in dealership prices.

Assuming the offerings are successful and the acquisitions are completed, the United group will show revenues approximating $1.4 billion on which revenues of 0.66 percent were generated in 1995. Cross-Continent projects revenues of $416 million, generating income of 1.4 percent.

Since both plan to use a significant portion of the proceeds to repay debt, these profit percentages should improve.

The groups that have put these offerings together are pioneers, and we've all heard the adage that pioneers end up with arrows in their backs. No doubt, the industry will watch the progress of these efforts with great interest.

Pasini is an automotive consultant with Berliner & Co., CPAs based in Woodland Hills, Calif.