Shiny new cars and stock portfolios in the showrooms?
Auto dealers and automakers in the United States used to have fairly close ties. Those ties loosened somewhat when many dealers added other - often foreign - brands to their lineup. Now, those ties may become even looser, as some dealers have started talking about going public. While public stock ownership is a basic tenet of American business, new-car dealers in America have remained - with one notable exception - privately held. That could be in for a big change. In a highly controversial move, a dealer in the Midwest has gone public, and other dealers are expected to follow.
The big question now is whether the automakers will let this trend accelerate, or will try to put on the brakes.
Opening a dealership today costs a lot of money - more than many businesspeople can raise on their own. According to the National Automobile Dealers Association, a trade organization, it costs at least $500,000 to establish a new dealership, and in major cities, the figure can climb into the millions.
Raising that amount of capital through public ownership is ``an idea whose time has come,'' argues Harold D. Johnson, chief financial officer at Steven Motors in Wichita, Kan. ``I think there are a lot of dealers out there contemplating going public, and a lot may be waiting to see how it goes for us.''
Steven Motors is the first automobile dealership to try going public, with a new offering of $2 million worth of stock priced at 10 cents a share.
Industry reaction to Steven's move has been mixed, and is precipitating a serious debate within the automotive community.
While proponents say the move to public ownership is simply an efficient way to raise equity, opponents contend that a publicly held company might serve shareholders at the expense of customers, putting profits ahead of service.
There is also concern on the part of the automakers that dealers will use stock offerings to raise money to add new nameplates, and in turn, these mega-dealers will be less beholden to the wishes, whims, and demands of any particular manufacturer.
Indeed, Steven Motors plans to use some of the proceeds from its stock offering to buy new franchises. Though the Wichita dealer holds a Ford franchise at one of its several separately located facilities, it did not put the Ford outlet on the public block as part of its recent stock offering.
In fact, the $2 million stock deal only covers the company's ``exotic'' nameplates, including Bertone, Maserati, and Yugo, the companies least likely to challenge the move toward public ownership.
Lou Priebe, a spokesman for the dealers association, says that ``it was only a matter of time'' before the first dealer went public. Asked if he expects other dealers to follow the lead of Steven Motors, Mr. Priebe says, ``You could draw that conclusion.''
Just the same, association president Jim Caplinger recently expressed his opposition, noting that ``I don't care for public ownership, and I don't know whether the manufacturers are going to allow public ownership.''
That, in fact, is a question the carmakers are in the process of reevaluating.
Until recently, the Big Three and most importers had been uniformly opposed to stock offerings by dealers, but in a letter to its dealers in April, General Motors Corporation announced it would no longer block public ownership on an across-the-board basis. Instead, a decision will be made in specific cases by the individual GM divisions using the same criteria normally used to approve or deny the sale of a franchise.
Ford officials, however, say they are still opposed to seeing their dealers go public.
``As we look into the future, our orientation will be on private capital approaches,'' Ford chairman Donald Petersen said, after the Ford annual meeting. ``Private capital continues to be available for any new dealership needs that we visualize at present.''
While Steven Motors may have sidestepped a confrontation by not including its Ford outlet in the stock offering, Ford's stand will be more directly challenged by a so-called mega-dealer based in Garden Grove, Calif. Campbell Automotive Group Inc. franchises seven separate nameplates, including not only Ford but also Audi, Mazda, Mitsubishi, Nissan, Porsche, and Volkswagen.
For $13.5 million, Campbell has agreed to sell a 50 percent interest to Lex Service PLC, the largest retailer of cars and trucks in Britain. Lex also happens to be a subsidiary of a publicly owned company.
Under the deal, Campbell Automotive will effectively remain private, but Lex's large stake could be just a first step to offering stock, acknowledges John Campbell, president of Campbell Automotive, and that is something ``no one is overlooking.''
``I was looking for more equity capital,'' he explains, ``but Lex is bringing more than just money.'' The British firm has had 40 years of experience as a mega-dealer, a familiarity that Campbell believes Lex can bring to the US partnership as it expands further.
Each of Mr. Campbell's seven franchisers must approve the deal with Lex, and each, he says, is approaching the subject differently. Some see this as a minor matter involving the addition of a new stockholder, while others view it as a change in ownership, a matter that requires a complex review.
Though he declines to discuss specific details of his negotiations with the seven manufacturers, Campbell says he expects to complete the deal with Lex and the franchise reviews by the end of the month.
Automakers and auto dealers aren't the only ones to look into the idea of going public, incidentally. Late last year, a major recreational vehicle dealer, Holiday RV Superstores, in Orlando, Fla., went on the public block, with an offering of 2.3 million shares priced at $2.25 each. The stock was snapped up in a matter of hours - and has already climbed to about $3.50 a share.