United Auto Group, Inc. Business Information, Profile, and History

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History of United Auto Group, Inc.

United Auto Group, Inc., is a leading acquirer, consolidator, and operator of franchised automobile and light-truck dealerships and related companies. In terms of total revenues, the company is the second largest publicly traded retailer of new motor vehicles in the United States. The company owns and operates nearly some 140 franchises in the United States and abroad, many of them focusing on the retail of foreign and luxury automobiles. United Auto Group's franchised dealerships include integrated service and parts operations. Subsidiaries engage in the purchase, sale, and servicing of automobile loans, as well as in marketing a complete line of aftermarket automotive products and services.

Selling the Concept: 1990-93

United Auto Group was founded in 1990 by Marshall S. Cogan, a New York City financier and investor who had amassed a fortune as a Wall Street dealmaker. Cogan, who owned the well-known midtown Manhattan restaurant "21" and controlled Foamex International Inc., a major automotive interiors supplier, traced his interest in consolidating the auto sales industry to a stint with his uncle's Chevrolet dealership in Cambridge, Massachusetts, when he was a teenager.

Cogan founded United Auto Group with two other investors: Apollo Advisors L.P. and Harvard Private Capital Group Inc., Harvard University's investment unit. Cogan invested $33 million and his partners, who came to include J.P. Morgan Capital Corporation, invested about $70 million in the enterprise. For $5.2 million, they bought a 70 percent interest in New Jersey-based DiFeo Automotive Group, the second largest dealer network in the New York City metropolitan area, with 1991 sales of $375 million, and later added other dealerships, including ones in Nyack, New York, and Danbury, Connecticut. By the end of 1993--United Auto's first full year in business--it was the eighth largest retail automotive dealer in the United States, with total revenues that year of $606.1 million. The company was employing 1,200 people and operating 41 franchises at seven sites in late 1994.

The purpose of the investors was to capitalize on consolidation opportunities within the highly fragmented automotive retailing industry by purchasing and operating family-owned auto dealerships and managing them professionally, controlling costs, and improving customer service. Other companies had begun doing the same in the 1980s, buying up smaller dealers, offering a wide variety of makes and models, and merging service and parts operations, but these efforts capsized in the junk-bond fiasco at the end of the decade. "This was an industry not well-regarded by Wall Street," Cogan recalled. "People avoid auto dealers like they avoid the dentist."

In spite of Wall Street's reluctance, Cogan felt that consolidation made sense, arguing that a big dealership franchiser could make money even during an economic downturn because most of the revenue would come from fixing and financing new cars, not selling them. He also argued that economy of scale would allow such a company to save money on advertising, credit lines, and computer processing. Carl Spielvogel, formerly head of the Bates Worldwide advertising agency, was brought in as United Auto Group's first chairman and chief executive. He said his mission was to turn the company's dealerships into supermarkets where customers could buy any car make, new or used, and get any kind of part or service. His strategy was to acquire dealerships in geographic clusters. "We try to surround a market," he told a reporter, "because it gives you the ability, in particular, to move used cars from one dealership to another."

United Auto Group's courtship of the nation's 23,400 auto dealers, many of them approaching or already at retirement age, was being matched by other ventures, such as Asbury Group, Cross-Continent Auto Retailers, and AutoNation USA, a subsidiary of H. Wayne Huizenga's Republic Industries Inc. United Auto Group paid cash for acquired dealerships: an average of $12 million for each of the three suburban Atlanta dealerships it acquired in 1996. In return, the company wanted the dealer to stay on (at least until professional management was installed) and for the business to keep its prior name.

Automakers traditionally had eschewed dealing with groups of dozens or hundreds of dealerships, opting instead to do business with small, often family-owned corporations tightly monitored under the franchise system. They were not sure they wanted to negotiate with megadealers who ordered cars by the tens of thousands, and they were especially resistant to the idea of selling to retailers who also offered rival car makes. This unwillingness began to change in the mid-1990s, when automakers such as Ford and Chrysler began to feel that large companies could help them cut the cost of delivering cars to dealerships from the factory, which some experts estimated was accounting for up to 30 percent of the retail price of a new car. In 1997 Ford and Chrysler were creating or proposing their own auto superstores, grouping their brands under one roof.

United Auto Group made it clear that selling used cars, which yielded profit margins of up to 15 percent--far more than the 5 percent profit on a new car--was an essential part of its strategy. One of its innovations was the Security Blanket, a 15-day money-back guarantee--unique for the industry--on all of its used cars, which were being sold on a few of the company's lots. United Auto's used car lots also offered a 132-point car inspection and, unlike their main competitors, made prices negotiable. The vehicles were mostly two- or three-year-old off-lease vehicles, purchased at auction. The company's wholly owned subsidiary, Atlantic Auto Finance Corporation, made car loans at attractive interest rates. United Auto opened its first strictly used car outlets in 1996 and, as of early March 1997, had eight freestanding used car superstores in four states as well as 51 new car dealerships, with used car areas, in 11 states.

Broadening Its Base: 1994-98

After earning net income of $1.2 million in 1993, United Auto Group lost $245,000 in 1994 on revenues of $731.6 million and $3.7 million in 1995 on revenues of $805.6 million. The company's fortunes began to turn around in that year, when DiFeo Group eliminated 17 unprofitable franchises--almost half the total--and about 250 jobs and tied pay plans to net profits and customer satisfaction. In 1996 United Auto had net income of $3 million on revenues of $1.3 billion, with Cogan attributing the turnaround to used cars. The company went public in October 1996, raising $180 million in a sale of common stock at $30 a share.

In March 1997 United Auto Group bought nine auto dealerships with 1996 sales of $430 million from John Stalupp and John Stalupp, Jr. Five of them were in West Palm Beach, Florida, and the other four were located on Long Island, New York. The acquisition price was $53 million in a combination of cash, stock, and promissory notes. By the end of 1997 United Auto had acquired a number of other dealerships, all of them in the South or Puerto Rico, and was the nation's second largest publicly traded auto dealership. It was first in the New York metropolitan area, with 23 dealerships.

Despite the rapid growth of the company, all was not well with United Auto Group. The common stock, which peaked at $35.25 a share in November 1996, plunged to $16 in April 1997, soon after company executives told financial analysts that overhead costs would keep first-quarter earnings from reaching previous projections. Spielvogel resigned his post and was replaced by Cogan, who adopted a strategy of concentrating on the "aftercare" market of parts and services, where profit margins could run much higher than on sales of automobiles. AutoCare was the company's subsidiary for aftermarket products and services.

Typically, fewer than one-third of new car customers were going to their original dealership for service, but Cogan was trying to change that with sales training and a database sending customers reminders about tune-ups and oil changes. At some United Auto Group dealerships, the rate of customers coming back for service rose as high as 60 percent. Another goal that Cogan announced for 1998 was to have 90 percent of United Auto's finance originations, including the loans bought by other lenders, pass through Atlantic Auto Finance's hands and generate fees. In nearly every case customers would make their checks out to the subsidiary, even if another lender actually held the paper.

United Auto Group continued to broaden its base in 1998. In January of that year, for about $28 million, it acquired five franchises with estimated 1997 revenues of $320 million. The company also purchased, for $14.5 million, The Triangle Group, Puerto Rico's second largest auto retailer with estimated 1997 revenues of $160 million. In July United Auto announced it had purchased two San Diego dealerships and had agreed to buy two more. The four franchises had estimated annual revenues of $160 million. Their acquisition brought United Auto's total to 98 franchises nationwide.

Expansion was not coming cheaper, however, and United Auto Group's long-term debt rose from $11.1 million at the end of 1996 to $238.6 million at the end of 1997. Interest expenses of $14.1 million were one reason the company lost $10.1 million on $2.09 billion of revenues in 1997. The firm also suffered when the big U.S. automakers cut prices of new cars, which depressed used car sales and pushed used car prices lower. United Auto Group took a pretax charge of $31.7 million in late 1997, related to the realignment of operations, including the divestiture of nine unprofitable franchises. Its stock fell as low as $9.50 a share in January 1998.

The Late 1990s

As of April 1998, United Auto Group was operating franchised dealerships in Arizona, Arkansas, Connecticut, Florida, Georgia, Illinois, Indiana, Louisiana, Nevada, New Jersey, New York, North Carolina, Puerto Rico, South Carolina, Tennessee, and Texas. The company was selling U.S., European, and Asian brands, ranging from economy cars to luxury automobiles and sports utility vehicles. Eight of its outlets were stand-alone used car retail centers. Vehicle sales accounted for 88 percent of total revenues in 1997. The company sold 50,985 new and 1,253 used vehicles.

United Auto Group had ready access to used vehicles through trade-ins for new cars, vehicles originally leased through its new vehicle dealerships, and used vehicle auctions only open to new vehicle dealers. In addition, only new vehicle franchises were able to sell used vehicles certified by manufacturers under a recently introduced program by which manufacturers supported specific high-quality used cars with extended warranties and attractive financing options.

Aftermarket products and service and parts operations accounted for 9 percent of total revenues. Aftermarket products included accessories such as radios, cellular phones, and alarms, as well as extended service contracts and credit insurance policies. Each of United Auto Group's new vehicle dealerships was offering a fully integrated service and parts department. Unlike independent service shops or used car dealerships with service operations, United Auto was qualified to perform work covered by manufacturer warranties. The company believed that its market share would grow at the expense of independent mechanics' shops, which might be unable to address the increased sophistication of motor vehicles and the increased expense of compliance with more stringent environmental regulations. It was actively marketing warranty-covered services to potential customers such as municipalities and corporations with large fleets of automobiles.

Atlantic Auto Finance was renamed UnitedAuto Finance in 1997. Based in Rochester, New York, UnitedAuto Finance accounted for 3 percent of the parent company's total revenues that year. It was the subsidiary for purchasing, selling, and servicing primarily prime-credit-quality automobile loans originated by both the parent company and third-party dealerships. UnitedAuto Finance also was receiving fees from financial institutions that purchased installment contracts from customers referred to them by UnitedAuto Finance. At the end of 1997 this subsidiary was serving about 250 dealerships in eight states.

In April 1998 Cogan was United Auto Group's largest stockholder, holding 20.5 percent of the common stock through Trace International Holdings, Inc. Aeneas Venture Corporation, an affiliate of Harvard Private Capital Group, held 14.5 percent, and a unit of Apollo Advisers L.P. held 9.4 percent.

Following news of continued business losses in 1998 (797 thousand versus 10.1 million in 1997), United Auto Group announced that they were seeking new investors. News that Chairman Roger Penske of Penske Corporation in Detroit might be interested set the stock prices of United Auto Group soaring in March. By April 19th Penske was in place as the company's new CEO, having invested 83 million in the company. In return, Penske Corporation was given a majority of the United Auto's board seats. Penske, a former race car driver, had a reputation for taking over companies and improving them--in the 1980s he'd taken the reins of Detroit Diesel Corporation and turned it into a legitimate competitor among diesel engine makers.

Profits skyrocketed shortly after Penske's arrival. By May 1999 the company could claim a 245 percent increase in profits, and a 213 percent rise in net earnings. By March 2000 Penske had plans for expansion into Charlotte North Carolina, a playing field that would set him directly against an old rival, Bruton Smith, owner of Sonic Automotive Inc. Industry sources said that Penske hoped to make Charlotte the hub of its new Southeastern operations, despite the fact that Smith already had several holdings in the same city. In May 2000 UnitedAuto Group launched into another industry first, and announced that they would be the primary source of automobiles for CarsDirect.com, an online firm that makes it possible to buy cars directly off the Internet.

New Territories in the 2000s

Come June 2000 United Auto acquired four Columbus Ohio dealerships, two sets of Infiniti and Mercedes Benz showrooms. It also moved its corporate headquarters to Detroit, Michigan amid news of other dealership acquisitions. The dealership acquisitions continued into the first of the year 2001, when Penske announced intentions to purchase at least 80 percent of UnitedAuto Group and possibly take it private. Penske's Investment company, Penske Capital Partners LLC, spent 64 million to increase the percentage of the company owned by Penske to 57.9 percent. Profits rose through the middle of the year, with the unexpected result that UnitedAuto squeezed from the third largest automotive retailer to become the second largest.

January 2002 saw a new first as United Auto Group expanded into the United Kingdom with two Mercedes-Benz dealerships, furthering the company's plans to become a global player in the auto retailing market. By May 2002 UnitedAuto Group had become joint owner of several automotive firms in Mexico, and partnered with German auto retailer Werner Nix to sell and service Toyota and Lexus automobiles in Germany. Profits continued to rise, up 19 percent in the first quarter of 2002. Record growth followed in the second quarter and retail sales rose 26 percent. In early 2003 UnitedAuto was able to announce continued double-digit profits, followed by another record first quarter. On the heels of consistently excellent financial news for several years running, Penske announced a ten cent stock dividend of ten cents per share for all investors in October 2003.

Stating that customers wanted "a buying experience, a broader selection and great customer service," in November 2003 Penske oversaw the acquisition and construction of so-called auto malls in major cities of the United States so customers could compare makes and models of cars before buying. The year 2004 saw a continuation of the policies championed by Penske since his arrival--expansion into Europe continued alongside acquisitions throughout the United States. Profits continued their upward climb as additional record quarters followed.

Principal Subsidiaries: Synter Group plc; Atlantic Auto Funding Corporation; UAG Capital Management, Inc.; UAG Finance Company, Inc.; United Auto Enterprises, Inc.; United AutoCare, Inc.; United AutoCare Products, Inc.; UnitedAuto Finance Inc.; United Lenders, Inc.

Principal Competitors: Larry H. Miller Group; AutoNation Inc.

Chronology

• Key Dates:
• 1990: United Auto is established by entrepreneur Marshall Cogan and partners.
• 1996: United Auto goes public.
• 1998: Penske Corporation becomes a major investor in United Auto.
• 2002: Company expands into the United Kingdom with two Mercedes-Benz dealerships.