Group 1 Automotive, Inc.

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Group 1 Automotive, Inc.

950 Echo Lane, Suite 100
Houston, Texas 77024
U.S.A.
Telephone: (713) 647-5700
Fax: (713) 647-5800
Web site: http://www.grouplauto.com

Public Company
Incorporated: 1995
Employees: 6,000
Sales: $3.99 billion (2001)
Stock Exchanges: New York
Ticker Symbol: GPI
NAIC: 441110 New Car Dealers; 441120 Used Car Dealers

Group 1 Automotive, Inc. is a leading consolidator of auto dealerships. The Houston, Texas, Fortune 500 company owns more than 70 dealerships that market 29 different brands through 110 franchises spread across nine states: California, Colorado, Florida, Georgia, Louisiana, Massachusetts, New Mexico, Oklahoma, and Texas. Group 1 also sells cars over the Internet and operates 24 collision service centers. It achieves some level of diversity by offering a mix of trucks and cars as well as imports and domestic brands. In 2001, for instance, the bestselling vehicle for the company was Ford’s F-series pickup truck followed by the Toyota Camry. All told, 53 percent of sales come from imports. Ever since its initial public offering (IPO) in 1997, Group 1 has aggressively added new dealerships, with a two-pronged acquisition strategy. First, it targets multiple franchise dealerships in attractive markets, businesses that will provide geographic diversity and immediately help to grow the balance sheet. These “platform” acquisitions may then be enhanced by “tuck-in” additions, single-point dealerships in the same area that add brands or services or in some way bring value to the hub operation. Another major facet of Group l’s philosophy is to decentralize the company’s operations, retaining local management teams and allowing them to continue running the business in a market they know better than the home office. What Group 1 is able to bring to bear are economies of scale that result in lower advertising and administrative costs, as well as greater buying power and less-expensive credit.

Formation of Group 1 in 1995

Group l’s chairman, president, and chief executive officer, B.B. (Ben) Hollingsworth, Jr., was the one with Wall Street experience among the men who founded the company in 1995. He was accustomed to positions of leadership: After growing up near Dallas, Texas, he attended Rice University on a football scholarship, playing quarterback. Upon graduation he went to work as an auditor at Arthur Young, then in 1967 was hired away by a client, Houston-based Service Corporation International (SCA), a funeral services company. When he joined SCA as a young executive, the business was far from prosperous. According to Hollingsworth, “There was always a question whether we could make payroll.” After the business stabilized it went public in 1969 and began to consolidate the funeral services industry, with Hollingsworth serving a key role in the acquisition process. By 1975 he rose to the rank of president in the company and began to travel widely, making valuable contacts. Years later he recalled, “You’re on the road talking to analysts, investment bankers, the media.” It was under his leadership that SCA went on an acquisition spree that resulted in it becoming the largest funeral services company in North America and a Wall Street darling.

Hollingsworth retired from SCA in 1986, then gained experience in the automotive retailing industry by buying a stake in A.J. Foyt Motors, Inc., a Honda dealership established in 1989 and located in the Houston suburb of Kingwood. In 1995 the seeds of Group 1 were planted when Hollingsworth was invited by Houston automobile dealers Sterling McCall and Charles Smith to meet at The Forest Club, an exclusive country club located in West Houston. The two men wanted to discuss a dealership roll-up and sought advice from Hollingsworth about the implications of taking such a venture public. As Hollingsworth recalled, “They had great dealerships, but they couldn’t find Wall Street with a street map.” What they did possess was a wealth of experience in the car business. Smith’s family, in fact, had been involved in automotive retailing since 1917 and Charles Smith had more than a quarter-century of experience himself. The family’s group of Texas dealerships generated revenues of more than $200 million. McCall had a similar level of experience; he was the first to be granted a stand-alone exclusive Toyota dealership in Houston. The three men agreed to go into business together and in December 1995 formed Group 1 Automotive, Inc. to acquire automobile dealerships and their related operations. For the family-owned dealerships, going public had an obvious appeal: it provided an exit strategy as well as security. Instead of having all of their wealth tied up in inventory, they would now have stock and the ability to become liquid if necessary.

October 1997 IPO

Over the course of the next two years Hollingsworth worked to put together an initial public offering (IPO) to launch the new venture, which would be formed around the assets of the founding groups. Hollingsworth joined with John H. Duncan, who operated a Kingwood Isuzu dealership, to form the Kingwood Group. In addition to the McCall Group and Smith Group, another of the founding groups was to be headed by Jimmie Kline whose Washington, D.C.-based Kline Automotive Group operated six Virginia dealerships. Shortly before Group 1 made its initial public offering, however, Kline dropped out, replaced by the Howard Group, headed by Robert E. Howard, who ran one of the largest dealership groups in Oklahoma and boasted nearly 30 years of experience in the car business. Despite a difficult climate for IPOs, Group 1 went forward with its offering in October 1997, pricing its shares at $12 and raising $57.6 million. Just prior to the IPO, backed by Goldman Sachs, the company acquired the assets of the founding groups, so that it started in business with annual revenues in excess of $825 million.

Shortly after completing its initial offering, Group 1 began to roll up dealerships. It completed four acquisitions at the cost of approximately $56 million in cash and stock. Two were platform acquisitions: Carroll Automotive Group, operating Ford dealerships in Miami, Atlanta, and Fort Lauderdale, Florida; and Maxwell Automotive Group, which owned Chrysler Plymouth, Subaru, Jeep, Eagle, and Dodge dealerships in Austin and Taylor, Texas. Both Jim Carroll and Nyle Maxwell signed long-term employment agreements to continue running their respective organizations, along with their management teams. The two other purchases were tuck-ins: Elgin Ford in the Austin area and a Beaumont, Texas, automall, Autoplex 2000, which included Mercedes-Benz, Dodge, Nissan, Volvo, and Buick franchises. These acquisitions were significant to Group 1 for a number of reasons. Not only did they provide the company with its first Ford dealership and supplement its Chrysler representation, they added more than $470 million in annual revenues, taking Group 1 past the $1 billion mark to roughly $1.3 billion. Wall Street, however, was not impressed. After a modest bump following its IPO, Group l’s stock price began to sag. Other retail auto consolidators were also upstaged by the sexier high-tech sector, which held the potential for spectacular gains, as opposed to the slow, steady growth that Group 1 was able to provide.

Despite the lack of investor enthusiasm, Hollingsworth and Group 1 pressed on with their plans. In March 1998 the company completed its second major purchase, paying $37 million in cash and stock for five dealerships in four separate transactions. Group 1 entered the Albuquerque, New Mexico, market by acquiring Johns Automotive Group, which owned a Chevrolet franchise as well as a Chrysler, Plymouth, and Jeep franchise. Group 1 also entered the Denver area by acquiring Luby Chevrolet, an 80-year-old business that was one of the largest dealerships in Colorado. In addition, Group 1 purchased a pair of tuck-ins: Flamingo Ford in Homestead, Florida, and Austin-area Highland Chrysler, Plymouth, Jeep, and Dodge. Altogether these purchases added some $300 million in annual revenues. Over the course of the entire year Group 1 acquired 33 dealership franchises and also broke ground on a new massive Ford dealership located in Pembroke Pines, Florida. Situated on 23 acres of land the operation would be one of the largest Ford dealerships in the country. It would be run by Carroll Automotive Group, which operated Group 1 ‘s platform in the Southeast. As a result of its acquisitions and internal growth, Group 1 topped $1.6 billion in revenues in 1998, with net income of $20.7 million.

In 1999, to fuel further expansion, Group 1 arranged a $500 million credit line, provided by a novel combination of ten commercial banks and the captive finance companies Ford Motor Credit Co. and Toyota Motor Credit Corp. A few months later, the line was doubled to $1 billion with the addition of another commercial bank and BMW Motor Credit Corp., Chrysler Financial, and General Motors Acceptance Corp. Other dealership consolidators soon followed suit, forming similar syndicates. In addition, in March 1999 Group 1 completed a secondary offering of stock, selling two million additional shares, and placed $100 million in ten-year notes, for a gross of $138.9 million. During the course of the year Group 1 was able to take advantage of this financial backing to acquire 11 more dealership franchises. Revenue for the year grew by more than $900 million, reaching nearly $3.6 billion, with net income improving to $40 million. The company’s stock, however, continued to languish, which Hollingsworth attributed to the automobile sector being out of favor with investors, due in large part to difficulties of a far more visible consolidator, Wayne Huizenga’s AutoNation, which was receiving adverse publicity for failing to live up to expectations.

Company Perspectives:

The executive team has an impressive track record of managing public companies, raising capital, completing acquisitions and operating in the automotive retailing industry. Executive management and operators currently hold more than 30% of the outstanding shares.

Entering New Orleans and Boston: 2000

While some of its competitors were forced to slow down their roll-up efforts, Group 1 in early 2000 continued to add dealerships, including two new platforms and a tuck-in. It entered into the New Orleans market by completing the purchase of Bohn Auto Group, which included Buick, Ford Pontiac, and GMC franchises that generated annual revenues in the range of $180 million. A second platform was established in the Boston area with the addition of Ira Motor Group, which boasted annual revenues of $260 million selling Toyota, Lexus, Porsche, Audi, Subaru, Mazda, Isuzu, Buick, and Pontiac. Group 1 also purchased Boston-area dealership Victory Dodge, which it renamed Ira Dodge and added to the new Ira platform.

Ira Motor Group offered an excellent example of the changes in auto retailing and why consolidation was embraced by many mom-and-pop operations. The business had grown out of a used car lot established in Danvers, Massachusetts, by Ira Rosenberg in 1967. Although it evolved into a nine-dealership enterprise, Ira Motors was very much a family concern, with Ira Rosenberg forging a strong bond with his employees as a way to grow the business. Rosenberg’s son, David, started working for his father in the mid-1970s at the age of 12 cleaning cars in the Toyota dealership, then worked in various departments through high school. Intending to work on Wall Street he entered the M.B.A. program at Columbia University only to find that he was more excited about applying what he learned in class to the car business than in pursuing a Wall Street career. He returned home to become general manager of Ira Motors, then took over when his father retired. In the mid-1990s David Rosenberg considered merging with other dealers and going public, but nothing came of the idea. He later came close to going public with Classic Automotive Group of New Jersey but that IPO was called off after the market soured. When he was approached by Group 1 about selling the business he quickly sensed that the two parties shared similar philosophies. Rosenberg told Automotive News, “The model that they presented to me was exactly what I was looking for personally and I also thought it was the best thing for my dealerships and for my employees.” Devoted to continuing his father’s commitment to their employees, the “Ira Family,” Rosenberg was now able to reward loyalty with better benefits and stock options, as well as attracting new talent. Rosenberg stayed on to run the new platform, his role with Ira Motors essentially unchanged, but now he had the backing of Group 1 to add more franchises. Rosenberg had other, more personal reasons for teaming with a larger public corporation like Group 1, telling Automotive News, “My father, for his whole life, always had everything at risk for the dealership. And it’s a lot more security not to have everything on the line all the time. After a while, you learn to live with it, but it’s certainly nice not to have it.” Moreover, Rosenberg sensed what lay in store for auto retailers: “My crystal ball tells me the people who are going to succeed and thrive are the people with the most resources, (those who) can invest the most in research and development in terms of new technology and strategies of customer retention—and I really think this is the way for us to be ahead of the curve.”

For 2000 Group 1 recorded revenues of nearly $3.6 billion and net profits of $40.8 million. As the bubble burst in the tech sector and the economy slipped into recession in 2001, investors began to appreciate the steady growth of Group 1 and car dealers in general. Unlike automakers, they were not saddled with huge fixed costs and during poor times they made money on their high-margin used car operations. As a result, Group 1 stock was finally rewarded by investors with a higher price. Furthermore, the company was able to raise another $100 million in an October 2001 secondary stock offering. Although Group 1 was unable to maintain its record of exceptional increases in 2001, it was still able to grow revenues to almost $4 billion and post a net profit of $55.4 million. Finances continued to improve in 2002, but it was becoming more difficult to find as many dealerships willing to sell, leading some observers to maintain that the best properties had already been acquired. Nonetheless, Group 1 was able to buy four tuck-in acquisitions in Tulsa and Houston at a cost of $85 million. It then completed a major acquisition, buying Miller Automotive Group in a $387 million deal that gave the company a platform in southern California, the largest automotive market in the country. From the start Group 1 had wanted to be in California, and it had long nurtured a relationship with Fred Miller who headed the business. According to Hollingsworth, the Miller family’s decision to sell was once again an exit strategy: “Their business has been in the family for almost 60 years. They reached the decision where they needed to get their estate in liquid order and prepare for their eventual retirement. This provided them an outlet.” As more family-owned dealerships were rolled up by consolidators, it was likely that the consolidators themselves would eventually start rolling up one another. Whether Group 1 would one day be acquired by a larger concern was very much an open question. When asked by a reporter about that possibility, however, Hollingsworth hinted that he was more interested in being the acquirer rather than the acquired.