What's Behind AutoNation's Land Lease Deal

Jul. 6.09 | About: AutoNation Inc (AN)

My opinion is there is more here than a quick glance would lead one to appear...

First the news:

AutoNation, the nation’s largest car retailer, has returned to Oxnard, spending $9 million for property it’s leasing to an independent operator who has opened two new dealerships — Mercedes-Benz and Smart Car.

In 1998, AutoNation entered the Ventura County market with a used car megastore in a location that most recently housed Cars 101. But a year later, AutoNation exited the used vehicle megastore business and shuttered nearly two dozen stores nationwide, including the one in Oxnard.

Both brands are products of German automaker Daimler AG. The parent company reported Wednesday that combined U.S. sales for its Mercedes-Benz and Smart Cars fell nearly 26.5 percent in June to 16,271, compared with 22,121 in June 2008. The company said it sold 15,155 Mercedes-Benz vehicles, a nearly 22.6 percent decline from a year earlier, while its smart USA line of micro-cars sold 1,116 units in June, a 56.2 percent decline.

Eberhardt could not be reached for comment, but his membership information with the Gerson Lehrman Group’s consulting network sheds light on his ties to Mercedes. From 2003 to 2007, he headed up Chrysler’s global sales and had responsibility for the operation in more than 125 countries with more than 5,500 dealers. From 1993 to 2003, he held a variety of roles with Mercedes-Benz, Daimler and Chrysler, including CEO of Mercedes-Benz UK Ltd.

AutoNation is acting as the landlord of the property, which is about five acres at 1511 Auto Center Drive. The Mercedes and Smart Car dealerships together total approximately 218,000 square feet, according to county records.

Eberhardt and AutoNation have an operating agreement whereby Eberhardt is running the stores, Cannon said.

“We’ve done this before,” he said. “This is not uncommon. It’s like I own the land for the hotel and Hilton comes in as a franchise. It’s really a simple deal. We’re the landlord, he owns the rights to the dealership.”

What is the deal? AutoNation (NYSE:AN) currently has 10% of the US market for Mercedes Benz through 14 Mercedes dealerships, and upcoming openings look to bring that total to 12%. We also know AutoNation wants more of the upscale auto market as it has proven less dramatically impacted by recessionary events. They have also not shown any inclination in this environment to reduce their move into this area.

But, like any smart business, while now is the time to be making deals, economic uncertainty does require a certain amount of prudence. This is, in essence a cheap way for AutoNation to get another Mercedes dealership up and running without large upfront expenditures. Anyone else want to bet this dealership eventually (2-4 years) becomes theirs 100%?

Disclosure: Long AN