For our 12th episode of Full Throttle, we are joined by Stephen Dietrich, partner at Holland & Knight LLP. Topics of discussion include Stephen's thoughts on the state of the industry, how technology changes are affecting dealerships, what's going on in the buy / sell market, and much more. Tune in, like the video, and subscribe so you don't miss our upcoming automotive industry podcast episodes!
For our 12th episode of Full Throttle, we are joined by Stephen Dietrich, partner at Holland & Knight LLP. Topics of discussion include Stephen's thoughts on the state of the industry, how technology changes are affecting dealerships, what's going on in the buy / sell market, and much more. Tune in, like the video, and subscribe so you don't miss our upcoming automotive industry podcast episodes!
This is Full Throttle the Presidio Group's automotive industry podcast. I'm your host, Jason Stein, Presidio's Managing Director and host of Sirius XM Cars and Culture on business channel 132. On a monthly basis Full Throttle serves as the industry's meeting point for great conversations with leaders across the automotive world.
If you look at it from 2019, if you skip, I know it's hard to skip 20, 21, 22. If you look at it, if you can bridge that gap, the industry is even healthier than it was from an operational standpoint, probably from a talent standpoint at some level than in 2019. Which is, which is a positive granted, some of those metrics are down if you're looking at 20 21 or 22. But I think you have to look in some level at those periods of time being a bit of an outlier, given what was going on, not just COVID but everything else that was going on.
The Buy/Sell market has realized momentum that Stephen Dietrich isn't sure he's seen in a long time, perhaps ever. With dealer valuations rolling along at levels that few have experienced, the work of one of the leading attorneys and retail facilitators in the business continues to show the kind of speed that has been nothing short of breakneck. At the same time, Stephen sits at the nexus of industry trends, seeing some shifts earlier than others, because he's in the middle of conversations with so many industry leaders from all ends of the spectrum. As we move toward the fourth quarter of a dynamic year. Today we check in with Steven to take the temperature on the industry, retail and the overall health of the business. Who better to ask than someone with an eye to the current and the future. Stephen Dietrich's experience as a deal maker and closer at Holland & Knight provides the perspective to see where the world is today. But more importantly, where it's headed tomorrow. He focuses his practice on mergers and acquisitions, debt and equity financing, and restructuring transactions, advising dealers or investors in the retail automotive industry on the acquisition and disposition of business operations. That includes manufacturer matters, real estate financing, and dealer licensing. Today we talk about macro pressures and micro movements. We also take stock on the overall Buy/Sell market, where he has assisted the Presidio Group on some of the biggest deals in the business. Full Throttle take a legal view today with one of the most connected leaders in this space.
Hello, this is Stephen Dietrich. This is Presidio's podcast, Full Throttle.
=We usually catch up with each other at NADA or some other automotive retail event. But I'm really honored to find myself here in mid summer, non NADA time see my friend Stephen Dietrich, great to be with you, Stephen,
nice to see, Jason. Nice to connect with you as well when we're not running around various conference venues or otherwise. So actually take a few minutes to reflect thoughtfully here.
Exactly a little, little mid summer break. And in fact, thank you for being part of Presidio's automotive retail event, which of course occurred in Dallas earlier this spring, where we heard all kinds of things about the industry. I want your view of the industry, Stephen, give me a gut check on the overall health and maybe the viability of the industry, because you always have your finger on the pulse. And when I've met with you in the past, I think the phrase hair on fire relative to all of the deals has been yours. Tell me about your view of the health of the industry.
Overall, I think the industry is healthy. There are a lot of interesting dynamics occurring in the industry. But I also think you're seeing the folks who are participating in industry being adaptable as they as they historically has been. The industry has always been reactive to whatever has been thrown at it and has found ways to adapt and deal with it and continue to work with their customers, and whatnot. So I think the overall health is good. I will say that there are a fair number of, some people use the word disruptions, other people use the word innovation, but whatever word you use, there's just a lot of things potentially happening within the industry. And so I think the the what the industry is weathering it well. But there are challenges, and not only challenges, like necessarily existential challenges, as some people talk about. But there's ongoing operational challenges in order to meet the core goal of selling vehicles and engaging in servicing the customer. So generally, overall, overall well, and with respect to if you look at it from 2019, if you skip, I know it's hard to skip '20 '21 '22. If you look at it, if you can bridge that gap, the industry is even healthier than it was from an operational standpoint, probably from a talent standpoint at some level than in 2019. Which is, which is a positive granted, some of those metrics are down if you're looking at '20 '21 or '22. But I think you have to look in some level at those periods of time being a bit of an outlier, given what was going on, not just COVID, but everything else that was going on. So I think that's that's really where we were, I would say the overall health is.
So obstacles you mentioned, walk through a few of those for me.
I think the biggest obstacle continues to be human capital, at every level of the dealership from the porter in the tech, salespeople, financial support controllers, GMs, all of those folks that are skilled individuals are in demand. And you see the there's been certainly I think a lot of the more successful dealers have looked internally and said, alright, what exactly do we need? Can we change? Who's doing what combined some roles, whatever that may be, but it all comes down to talent. And I think everyone is realizing that there continues to be a dearth of talent at all these levels, which I think is having an impact on operations of current dealers who are struggling to meet the customer demands with that talent base. And it certainly is having an impact on any sort of growth that other dealers may want or other financial investors may want. So that I think is the biggest challenge, I think, the interest rate issue that is out there. And by issue, I mean, just the fact that interest rates are going up, is finally starting to really impact any number of levels, because I think you had dealers who had credit agreements that are now coming up for renewal. So this new interest rate is now impacting them, that I think consumers are really starting to get impacted by then it may be starting to impact the way they buy what they're willing to buy, or willing to finance. So I think those are probably the two biggest obstacles that are out there and I'm sort of cleaving off the entire aspect not not because it's not important but you have EV issues that are out there and then the structural side of things, and all that innovation coming out from the EV, or the autonomous side, which, you know, I don't think we're gonna get to autonomous, but you're seeing a lot of innovation in the vehicles themselves. And that's going to be potentially an obstacle just on how that interacts with the the OEM and how they want to, you know, either participate in those issues or not. So I think those are probably the three biggest pieces. And I could go on, but I'll pause.
Yeah. But one leads to the other leads to the other doesn't.
Yes, yes, there are.
As technology changes, the workforce in the labor market needs to be more skilled. And as technology changes on the EV, side, affordability, which we've talked about a lot on this program becomes an issue, which is your second point. So it's a trifecta to some extent.
Yeah, I think they're all they are all intertwined. And that's that's sort of why I think people are looking at the industry and trying to figure out is, you know, with all that disruption, is it is it still healthy industry? And it's still come back to say, yes, these issues have to be sorted out, because as you said, you know, the technology that's coming in, I was talking to someone the other day, and the question is, is the technology that's coming, actually innovative and going to change the way that you buy or sell a vehicle? Or is it a replacement for a function that's already out there? And I think there's some of both, but I think a lot of the technology that has come from the last five or 10 years has been to replace current operations. And the question is, is the new technology that's coming out now going to actually change the actual dynamic, that may mean that you have one person who walks the customer through the entire process, whether that's in person, whether that's online, rather than a sales individual, someone on the service side an F&I individual and a credit person who may just have one person doing all of that, because the technology now is there to train that person to walk through all that they don't have to be an expert at the depth that they needed to. So that's one example of how that may change things and, and certainly on the broader side of it with the EV side of the world, you've got that that technology is going to impact the dealers from a bricks and mortar standpoint, as well as their interaction with the OEMs. And so you've got a double barreled aspect, when you think of EVs of having to change and create infrastructure just to deal with it. And then is that dovetail into some sort of greater good or community involvement? Because of these charging stations? Are they now going to be solely related to just that particular brand at dealership? Or is there a broader view of saying, well, maybe we need to think of the broader infrastructure and allow the people come use our chargers, regardless of the vehicle that they're on? So it kind of ripples through our competitors? Now we're going to be letting their customers, their competitors, customers come on to their lap, because it's closer. And does that have good or bad effects on the dynamic because it's an opportunity to connect with the customer that you wouldn't have had before?
Not to mention the level of investment that's going to be required, what are you hearing from dealers who are staying in the game, and yet having to transform their dealer lots or or invest heavily?
I think the folks who are who've taken a long look at it and reflected on it and said this is going to be something that we need. And so I think the there's a willingness to do that particular investment. But what I'm also seeing is creatively thinking, how else can I use this? How else can I benefit from this side of it? And there's conversations with the various manufacturers of can I use this for any number of potential vehicles, if the technology and hardware will interact with each other? They're talking to their local communities to say, is there a way that I can get some subsidy, perhaps on that side of it, if I build this in will allow it to be accessible to a broader group of people rather than just our customers? So I think everyone think everyone who's been thoughtful and thinking about this, in my experience is like, look, it's coming. So it's not a matter of if they're going to do it. It's a matter of when and how. And so I think the conversations we're starting to see are, do we change the hardware, rather than just what's being told to us by the manufacturers? Do we get something that's more, you know, user friendly, across different aspects. And they're also working with their communities. I said, one thing that a lot of people don't realize is, that's a lot of power to have to bring to these stores. And so some of these issues are infrastructure matters. And so these dealers are actually having to go out and say, well, I need you to rebuild a lot and run a line with that much power to my business, which has a whole nother conversation, because now you're talking about connecting to the grid in a different way. Right, and how do you have that conversation with with your community? So it's, it's having a ripple effect. But the net net to your question is, I think people are starting to embrace it. They're just trying to embrace it on terms that makes sense to them, not necessarily what's being mandated that they put in.
What are you hearing in the Buy Sell market, you always have your finger on the pulse is there what's what's the activity? Maybe the market forces going on right now, Stephen,
I think there's a fair amount of activity I, I would be disingenuous if I'd say was the same as '21, or '22. I think the beginning of '23 really was fairly robust. But that was picking up what didn't get done in 2022. And so I think, now we're starting to really see, I think, what the market may look like, but but there are still activity, there's still interest both on, you know, one or two dealerships to plug and play into into a group that's expanding, or in their particular market to ongoing conversations about new entrants in the markets to some of the larger transactions. I mean, 2022 is interesting, because it didn't have any mega deals. You know, I don't know how many more mega deals are necessarily left out there. And if you really look at it, you know, and what, what defines a mega deal, we're gonna have to get into, you know, are you are you over the billion dollar mark? Is that make it a mega deal, because a lot of these dealership groups that are four or five, six dealerships, which would not be considered a mega deal, if you think about it are still pricing at several 100 million dollars, you know, as you look at it. So I think there still is interest out there. I do think that it is slowing down. And I think some of that is a practical reality, I think you're having the buyers are looking at it saying, what's our return on investment? You know, and they're digging into it. And they have to really figure out well, what's the new reality going to look like now that we have perhaps a little bit of a plateau or even a little drop back from 2020 '21 '22? Operations? What is the business look like? So I think it's taking longer to price. And then once you're into the deal, it's taking longer, because you've got your vendors and other other players that you need to get these things done, are slower, in many instances. And that gets back to the human capital problems that I talked about earlier, as many of the manufacturers don't have as many employees to process the applications. Surveyors, phase one consultants, you know, title work, all of that sort of stuff. We're a third party vendors that you may not think are going to affect the timing of a deal. But they do because they're taking longer to get the diligence done. And so we have to deal with those issues. And then you've got the gorilla in the room is the lenders, which are undergoing massive amount of change. They've got stress, because of the interest rate hikes. So they're trying to figure out what we're where does that land are, we are we willing to lend as much given the cost of capital, so their underwriting, I think, has gotten more aggressive? I didn't know if that was going to be possible to say, but it has. And then you also have the stability of the banks themselves to ponder in. And so you have people who are going out to look for money, talking to banks, and one of the questions our clients are asking, the lender is like, what's your balance sheet look like? Right, because if I'm going to be borrowing from you, I need to make sure this 5, 6, 7 year loan is going to stay with you and you're healthy as well. And so there's an interesting dynamic where the banks are now getting a little bit of diligence, as people are looking to see if they're going to be a viable entity on a going forward basis. So, which I think is a significant change. It's almost leveling the playing field a little bit because the banks have to now say, this is why we're a good bet for you to borrow from us. So it's a little shift of I think of the power dynamic between the lender and the borrower in that situation.
Are there still some out there who have what was described before is unrealistic expectations for what they think they can get for their stores?
I think so I think there, there are a fair number of folks. And you'll always have a bit of a disconnect. It's the nature of, I'll say any business, but it's certainly the nature of the auto space that everyone is optimistic. And so the sellers, like, oh, this has been a three month trend, but we're going to really, you know, crush it the tail end of the year. And so there's always those conversations, I think that the expectations are getting closer together at that, meeting the disconnect between the buyer and the seller, I think was really great. Probably the end of 2022, coming into 2023. And now we're starting to get results from '22. And having those integrated. And so I think you're beginning to see a little bit more rational thought out of out of the sellers. And looking at that. And, you know, I've started to hear folks, you know, engaging with those particular conversations and talking to them saying, well, let's say you normalize '21 and '22. And you look at '19. And those sorts of conversations tried to find baselines to look at, where's the where's the last year so that wasn't the case, because the growth curve was just up so dramatically that people were like, well, this is what there's no reason to see it stopped. Well, now you're starting to see that plateau. And so sellers are starting to be a little bit more realistic and buyers are going to be buyers. They're going to continue to look at their return on investment and there are different impacts there. Now they have to worry about their credit costs more to borrow the money cost more to retain capital, your human capital your people. So the return on investment calculation, I think is getting a little more granular. And there's more inputs there than there used to be. So I think that's also creating some of the, the disconnect and the timing, it just takes longer to figure out what the deals were doing.
You've been part of some mega deals, you use the phrase, when we talk about the public's, what do you see happening in that space right now?
I think the public's are looking to buy where it makes strategic value to them, I still think that you know, because the public will look at their market a little differently because they have to react to the public market. And so they have another avenue when they look at investment that some of the private folks don't have, they can always look at their own stock, and what the value of that it may be. And I think there's right now it's a little bit of a mix, I think it's depending on how you may be looking at the market. I think the public's are saying all right, it is now time to get back in and do some purchasing either within their markets that are already in to shore up what they can do, or entering some new markets that they think are strategic, because there's not as big of a disconnect on the investment of either buying back their own equity, or going on buying dealerships that are either performing well now or that they think can be turned around that return on investment. I think that delta is getting closer than it was probably most of 2022.
What other activities are you witnessing related to the market? Where Where does the back half of this year go for you from a priority list of things to watch for in the industry, Stephen?
I think the credit issue is going to be really something to watch, watch for to see how how that gets digested and normalized. And if the banks are willing to lend to the same breadth of people, even though the interest rates are higher, and the credit underwriting is a little bit more stressed, I think that's something to look for. I also think it's worth thinking about as people come out of what was a very energetic time. And basically, from June of 2020 until January of this year. I'll use energetic that's the best I could use. Yeah, as people come out of that, and there starts to be some potential normalization. I think the issue is going to be are there still people that want to get out? And what are the reasons? Because I think they may want it to go out because the values are so high. And now the values are coming back a little bit, they're still going to be higher than they were in 2019. And fairly robust as you go forward. But I think people are going to say, hey, weather that storm, if things level out. Those folks that might be thinking, well, maybe I should have gotten up before but I'll ride the wave again, maybe thinking I'm just going to stay in for another three or four or five years. If there's a lot of those folks. And I think you'll see a material slowing of the M&A activity, because those are the people who are going to be driving this when it's a more of a level set valuation. It's people who want to get out for other reasons, not purely for the money, you got, you know, succession issues, or energy issues people like or I don't want to go through what's going to transform and we talked earlier about EVs and was other stuff, there's a group of people that have to look in the mirror and say, Alright, I've been through three or four, quote unquote, significant events in the auto industry. Do I want to go through another one? Or is it time to get out and I'm happy with the value because the value hasn't been deteriorating? It's still holding strong. It's not like a fire sale. The question is, do you want to stay in and ride this next cycle? Which is probably going to be a three or four year cycle?
Would you have imagined everything that you've encountered in the last few years? Given your history prior?
No, not not at all. I mean, I, I, again, I was talking to someone the other day, and I said, it was someone not in the auto space, and they're asking about the industry and their gut reaction was, well, things must be really bad, because inventory was low and these other things. So you know, shockingly, the dealers have made more money since COVID, than they've ever had historically. Going forward. We just started talking a little bit about that, why that was and what it may be in a sec. At some level, it's inexplicable to me that the economy and this industry has taken. God knows how many body blows in the last three years. Along with you, that's the general economy, then you look at what this industry itself has been doing with the EV change, and the manufacturer is starting to try to change the relationship with the dealers. And the you know, that the ongoing technology changes, that what's going to be the speed bump on the industry, and I really don't know what it will be. It seems to me that maybe interest rates are slowing things down a little bit, and maybe some of the political environment that's out there. And the war in Ukraine certainly weighs on markets and in other ways, and so, but it's interesting backstory to see All right, well, it's something that may slow the industry down. But I don't know that it's down and out. And I think that's really one of the real strong issues because I, I get it, I give an interesting perspective because I talk to people who are in the industry, but also talk to people who are thinking about getting into the industry. And those people, it's almost more interesting to talk to, because like, Well, why? Why do you want to get into this industry? You know, what have you what have you watched in the last five or six years that says, I still want to buy into the industry, and its resilience. If you look at a lot of other industries, they may, they may fly higher than the auto space, but they also sink a lot lower. Whereas the the auto space has been consistent on a regular basis for decades. And if nothing else, the the last couple of years have proven that they can take these body blows and then figure it out. You know, in the in the small scale, there are going to be some winners and some losers, but the industry as a whole is holding steady. So it depends on your perspective.
You will be sitting ringside taking score on all those bodies that occur inside of it. Stephen Dietrich, partner at Holland & Knight, thank you so much for being on Full Throttle. Thanks for being part of our retail automotive event in Dallas this past April. We look forward to seeing you again.
Thanks, Jason. I always appreciate the conversations that make me think and I enjoy that. So you pushed me a little bit. I appreciate you.
You make us think too. Thank you. Thank you. Thanks again to my guest, Stephen Dietrich, partner in Holland & Knight. And thanks for listening to Full Throttle. Come back to us later in the month for our next interview on this platform. Suggestions? Email me at JStein@thePresidioGroup.com and to learn more about the Presidio group, go to ThePresidioGroup.com or follow us on LinkedIn. Thanks again for listening