Thursday, December 1, 2022
HomeValue InvestingAutomotive Seller Rollup Gone Dangerous, Pursuing a Sale

Automotive Seller Rollup Gone Dangerous, Pursuing a Sale


Full warning, much like Armstrong Flooring (AFI), this could possibly be a horrible thought, it has important pink flags and is very speculative.

LMP Automotive (LMPX) is a micro-cap (~$45MM market cap) that got here public in late 2019 with a automotive subscription mannequin the place customers might hire a automotive month-to-month, positioning itself as splitting the distinction between a short-term automotive rental and a standard automotive lease.  LMPX then put a web-based supplier/cell app enterprise mannequin spin round it to market the inventory.  In 2020, LMPX turned a little bit of a meme inventory, briefly buying and selling up alongside different e-commerce automotive sellers like Carvana, however then crashed as they had been unable to supply automobiles economically to run their subscription mannequin.  As an alternative, the corporate pivoted to be a standard automotive dealership rollup enterprise and went on a debt fueled acquisition spree in 2021.  LMPX completed the 12 months with 15 new automotive dealerships and 4 used automotive dealerships throughout 4 states.  On 2/16/22, the corporate stated they had been unable to safe new financing for his or her beforehand introduced however not but closed acquisitions (7 of them!) and rapidly pivoted to pursuing a sale:

Sam Tawfik, LMP’s Chief Govt Officer, said, “The Firm intends to terminate all of its pending acquisitions in accordance with the phrases of their respective acquisition agreements, primarily because of the incapability to safe monetary commitments and shut inside the timeframes set forth in such agreements.”

“The Board of Administrators believes that LMP’s present inventory worth doesn’t mirror the Firm’s honest worth. Given the file M&A exercise in our sector and multiples being paid for these transactions, LMP’s Board of Administrators has directed administration to right away pursue strategic alternate options, together with a possible sale of the Firm.”

The inventory closed at $5.25/share on 2/16, it now trades for ~$4.25/share.

Placing apart terminal worth questions (auto OEMs bypassing sellers, electrical automobiles needing much less upkeep), automotive dealerships are pretty excessive money flowing enterprise and had been large covid beneficiaries. There’s a lack of provide (nationwide, dealership stock is ~1/third of regular, going to take some time to normalize) that has raised costs and diminished the necessity for automotive salespeople (dealerships have been sluggish to rehire these laid off throughout the pandemic) as extra folks browse on-line and the low stock has all however eradicated haggling.  Automotive house owners are additionally holding onto to their automobiles longer creating extra excessive margin service income.  A few of these covid adjustments could also be lasting, many sellers speak about stock being completely decrease as sellers turn out to be extra of a distribution heart and fewer of a spot the place folks stroll the lot to seek out the automotive they need, they’ve already selected the specs on-line earlier than going to the supplier.  

There are millions of dealerships throughout the nation, they’re moderately liquid property that change fingers recurrently (much like why I like REIT particular conditions, the property are fungible and there is a massive pool of consumers).  Right here, there are 7 massive publicly traded dealership teams (KMX, LAD, PAG, AN, ABG, GPI and SAH, however solely ~10% of all dealerships) and lots of different massive non-public ones.  The windfall income of the previous couple of years has prompted the bigger public gamers to do lots of M&A, rolling up this fragmented market.  Whereas massive dealership teams are thriving, many smaller dealerships are struggling to supply stock and are liable to failure, with a view to press their scale benefits, the large are getting larger.  Awkward great distance of claiming, I do not assume LMPX could have bother discovering consumers for his or her dealership property, however it’s extra a query of worth.

Given the speedy rollup nature of LMPX, nailing down the valuation causes a little bit of mind harm to work by way of the financials, this is what CEO Sam Tawfik stated within the Q3 earnings name:

Our third quarter annualized run charges excluding the acquisition we closed this quarter, which we count on to be instantly accretive to revenue this quarter are $565 million in income, and $47.6 million in adjusted EBITDA.

The acquisition referenced above is the White Plains Chrysler Dodge Jeep Ram Dealership that closed in October, bought for $19.2MM that was estimated to generate $2.6MM in 2022 EBITDA.

Then within the firm’s annual letter on their web site, Tawfik supplies:

We accomplished the acquisition of our contracted White Plains, New York Chrysler Dodge Jeep Ram within the early fourth quarter utilizing roughly $5 million in money from the corporate’s steadiness sheet, 55,000 shares of widespread inventory and $1.3 million in money from our present credit score facility. This acquisition will probably be instantly accretive to earnings within the fourth quarter of this 12 months. Because of this 12 months’s acquisition exercise, the corporate presently owns 15 new car franchises, operates 4 pre-owned shops throughout 12 rooftops in 4 states which generate over $600 million in annualized income.

Later:

 We intend to pay down our present time period debt by roughly $11 million within the fourth quarter of 2021, leading to a steadiness of roughly $85 million, of which the corporate allocates $53 million to its real-estate holdings and $32 million to its dealership blue sky buy debt. Basically on the present tempo of cashflow era, if we select, the corporate can extinguish its present blue sky debt in lower than a 12 months.

Including it up collectively:

The automotive enterprise does have some seasonality to it, Q1 is often decrease than the opposite quarters, so annualizing Q3 EBITDA is not an ideal run price.  I tried to normalize that and LMPX’s give attention to tier 2 dealerships (home and financial system imports manufacturers) which fetch a decrease valuation than luxurious within the 4x EBITDA a number of.  Clearly, I am not a automotive sector skilled, be happy to right or push again, however looks like there could possibly be one thing right here regardless of all of the dangers under.  I purchased a smallish place this week.

Dangers/Crimson Flags:

  • Clearly, high of the listing, LMPX went on a loopy acquisition spree in 2021 and could not increase capital to finish them (credit score circumstances have tightened barely this 12 months, however nonetheless fairly open).  Most of those offers included a mix of debt and inventory, struck when the inventory was $15-$17, by the point it got here to shut these transactions the air was being set free of the expansion balloon, the inventory was $7 and the window to boost capital closed on LMPX.  Shopping for dealerships at 7x EBITDA whereas the inventory trades effectively under that does not make a lot sense.  It could possibly be nastier than that easy rationalization underneath the hood, however the Q3 numbers look pretty first rate, this can be a mess however was not less than money stream constructive over the last reported quarter.
  • Tawfik owns roughly 35% of the corporate, he seems to be the only real choice maker and would not appear to have a robust board round him.  There are a selection of associated social gathering transactions, none seem overly egregious however in whole they do not look nice, plus in October, Tawfik purchased an organization airplane for himself just a few brief months earlier than all of it fell aside.  His biography consists of founding Telco Group which was offered to Leucadia again in 2007 for $160MM and likewise based PT-1 Communications which was offered to Star Communications in 1998 or $590MM.  Presumably he isn’t completely incompetent however may need simply gotten caught up out there hysteria final 12 months.
  • Tawfik has been promoting a small quantity of shares recurrently as a part of a 10b5-1 plan, I am not an skilled on these insider promoting plans, undecided if they are often cancelled midway by way of, however it’s not an incredible look in case you assume the inventory is materially undervalued.
  • LMPX stories EBITDA per share versus enterprise worth, that is all the time a pink flag for me as it’s deliberately evaluating apples to oranges.
  • Their present time period mortgage matures in March 2023, so they have somewhat time to get this course of finished and fewer of a compelled sale than AFI.

Disclosure: I personal shares of LMPX

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