Honda Canada prohibits ownership of its dealerships by publicly traded companies; AutoCanada says its acquisition doesn’t give it an ownership position in the store.Peter Power/The Globe and Mail
AutoCanada Inc. executive chairman Pat Priestner will buy a Honda Canada Inc. dealership with financial backing from the publicly traded dealership group, but the auto maker says it will still ban ownership of its outlets by publicly listed companies.
Mr. Priestner is purchasing Whitby Oshawa Honda, backed by a loan from AutoCanada that will finance 80 per cent of the purchase price in return for the dealer group receiving about 80 per cent of the profit the dealership generates.
The so-called "participatory loan" enables AutoCanada to participate in the profit of the store while allowing Honda Canada to maintain its prohibition on ownership of its dealers by publicly traded companies.
"Clearly it's not an ownership position in the store," said Mr. Priestner, who is also the founder of AutoCanada, the country's largest publicly traded dealership group.
Honda Canada does not permit such ownership, unlike its sister company American Honda, which does. For example, AutoNation Inc., the largest U.S. dealership group, which is publicly traded, owns 22 Honda stores.
Asked why the U.S. sales subsidiary of Honda Motor Co. Ltd. allows the practice while its Canadian unit does not, Honda Canada spokeswoman Maki Inoue said: "We are not in a position to speak to the practices of American Honda."
Honda Canada has "no relationship with Auto Canada," Ms. Inoue said in an e-mailed response to questions about the deal. "Honda Canada believes that building a personal relationship with its operators and certainty of ownership are of fundamental importance to the success of its dealers."
The company permits ownership by large dealer groups if they are privately held.
Canada's largest group, controlled by the Dilawri family, owns 57 dealerships and included seven Honda outlets and four of Honda's luxury Acura brand dealerships in a real estate investment trust.
Industry sources and other dealers said they believe the arrangement with Mr. Priestner opens the door to allowing publicly traded dealership groups to own Honda Canada stores.
"To me, it says public is fair game," said one former senior industry executive familiar with Canadian dealership operations.
The deal allows AutoCanada to participate in profits generated by an auto maker whose dealerships it doesn't already own, industry analyst Anthony Zicha, who follows the company for Bank of Nova Scotia, said in a research note.
Mr. Zicha added the deal to his acquisition guidance for AutoCanada.
"The transaction supports ACQ's acquisition guidance, which calls for six to eight [new] dealerships by May, 2016," he said in the note.
Other auto makers that prohibit ownership of their dealers by AutoCanada include Ford Motor Co. of Canada Ltd., Mercedes-Benz Canada Inc. and Toyota Canada Inc.
Each of their parent companies permits the practice in the United States, where AutoNation owns 35 Ford stores, 23 Mercedes-Benz outlets and 20 Toyota dealerships.
The bans restrict AutoCanada's ability to diversify its operations to Ford and Toyota, the No. 2 and No. 4 auto makers on the annual sales list this year, and its growth in the luxury market, where Mercedes-Benz leads the sales rankings.
Mr. Priestner said he expects the car companies that ban the practice to eventually ease the prohibition they place on ownership of dealerships by publicly traded companies.
"I firmly believe that over a reasonable period of time, they're going to have to, given the amount of dealers selling dealerships – including dealer groups that are going to sell in the next few years," he said.
Mr. Priestner owns Ford and Toyota dealerships that were purchased without the assistance of loans from AutoCanada.
AutoCanada purchased the Hyatt group of dealerships in Calgary in 2014, but the group's Acura outlet was excluded from the deal.
The dealer group operates 52 dealerships and is trying to increase its portfolio outside its Western Canadian base.