As Brookfield’s acquisition of Capital Automotive closes Monday, Capital jumps into Canada with Phaeton Automotive Group purchase.The Globe and Mail
Capital Automotive, a U.S.-based real estate company that purchases the land and buildings of auto dealerships, has re-entered the Canadian market amid a wave of consolidation that is transforming vehicle retailing in Canada.
The company, which was acquired by Brookfield Property Partners earlier this year in a deal that closed Monday, has bought some real estate holdings from Phaeton Automotive Group of London, Ont., which intends to expand beyond its existing Ford, Hyundai, Lexus and Toyota dealerships.
"If we have a partner like Capital Automotive, and they handle the real estate side of it, then we can focus on the operational side," Phaeton president and chief financial officer Mohan Janakiraman said Monday, "because we want to be a very profitable group as opposed to a small dealership group which just looks at real estate as an asset that creates an annuity for retirement."
The deal and Phaeton's plan to expand come as owners of single dealerships or a handful of stores increasingly decide to sell to larger dealer groups that can afford to finance the facility improvements demanded by auto makers – which run into the millions of dollars – and the costs of constantly upgrading technology.
"The name of the game in the dealership business right now is consolidation," said one industry source.
The trend is spreading beyond the so-called mom-and-pop single point dealerships to some smaller dealership groups, as demonstrated by the purchase earlier this year by AutoCanada Inc. of six Hyatt Automotive Group Inc. stores in Calgary and Hyatt's right to open a new Nissan dealership in that city.
"Seems like the big players are wanting to expand big time," said one B.C. dealer.
AutoCanada, the only publicly traded dealership group in Canada, has been an active purchaser, as have such big private groups as the Dilawri Group.
"The market for buy/sell activity is very strong," said Willie Beck, Capital's senior vice-president and director of acquisitions. "Many of the leading groups are continuing to acquire additional dealerships and that's when our program is very attractive for using our capital to facilitate those transactions."
Capital, which is based in McLean, Va., was purchased by Brookfield Property Partners for $4.3-billion (U.S.) in August. Bermuda-based Brookfield Property was spun off by Brookfield Asset Management Inc. in 2013.
Capital sold other Canadian real estate holdings in 2010 and 2011.
Phaeton, which owns dealerships in London and Richmond Hill, Ont., believes in generating profit from all aspects of the business, Mr. Janakiraman said, as opposed to the industry's traditional focus on new cars.
The group will look at luxury dealerships as well as mass market stores, he said.
"You can't just expand for expansion's sake," he said. "It has to be part of a well thought-through profit model."
The recession slowed down what had already been a consolidation trend among Canadian dealerships and softened valuations, but "never really knocked it on its butt like it did in the United States," said one industry source familiar with acquisitions.
"There are now more buyers in the market than say, five years ago," the source said.
There were 107 dealership groups that owned five or more stores at the end of last year, compared with 86 in 2009.
The number of dealers owning a single outlet fell to 1,726 last year from 1,960 in 2009.
Single-point dealers owned more than 57 per cent of the outlets in Canada in 2009. That number fell to 49.8 per cent last year.
An earlier version of this story incorrectly stated that Capital Automotive has purchased Phaeton Automotive Group when it has in fact purchased real estate from the company