The Sky s The Limit For Lithia Motors

The Sky’s The Limit For Lithia Motors

Lithia Motors' long retreat instigated by the credit crunch during the Great Recession has turned into a full-on frontal charge.

The Medford-based auto retailer has churned out record sales figures and profit in recent quarters as it cautiously and incrementally rebuilt its store count.

This week, Lithia unsheathed much broader plans, announcing its largest acquisition to date and extending its reach coast to coast. In doing so, the company achieved objectives postponed when it sold or closed dozens of its dealerships between 2008 and 2010.

The $362.5 million cash and stock purchase of South Amboy, N.J.-based DCH Auto Group, whose primary owner is a Hong Kong firm, expands Lithia's store count beyond its previous apex, making it the nation's fifth-largest auto retailer. As of Tuesday, the company operated 101 stores in 11 states. When the deal closes in October, there will be 128, although it's possible other buys may occur before that.

Previous acquisitions have been integrated into Lithia's system, losing their identity. DCH, however, will be a separate unit, much like Alaska Air Group is the holding company for Alaska Airlines and Horizon Air, said Lithia CEO and President Bryan DeBoer.

"Our board will perform the same strategic functions as it does now," DeBoer said. "Our growth opportunities have been mostly limited to small- and medium-sized markets. This allowed us to expand two-and-a-half times our potential store growth externally.

"Now we will be able to grow in typical Lithia fashion, but also have the opportunity to look at stores in metro markets."

"We're not experienced operators in metro areas and we're relying on the expertise of (DCH President) George Liang and his team," he said.

DeBoer said the company has pinpointed cost-saving measures and is confident there will be used-car opportunities downstream.

"We're going to attack market share and capture market share with some of the largest import and luxury stores in the country," he said.

In one relatively immense step, Lithia has shed its Chrysler-centric status to a balanced portfolio the company has long sought.

Combined with DCH Auto Group's $2.3 billion annual revenue, Lithia Motors will become a $7 billion company. The employee count will grow by 2,600 to 8,600 nationwide.

Honda/Acura and Toyota/Lexus dealerships comprise 82 percent of DCH's sales. The combined company will have 56 percent import sales, led by Honda (26 percent) and Toyota (21 percent); 30 percent domestic sales, led by Chrysler's 18 percent contribution; and 14 percent luxury sales, with BMW holding down 7 percent.

"We've wanted to get ourselves balanced and protected from the future," said Vice Chairman Dick Heimann. "Markets go up and down, people change import to domestic and luxury. We have to feel we could do business in all parts of the country: East Coast, West Coast, South and North. In concentrating on one franchise or one area of the country, then we're vulnerable. When the financial crisis came, we were wounded and our stock was down to a buck-and-a-half."

Investors have responded enthusiastically. Lithia shares went from flirting with $80 at the end of last week to an all-time high of $88.50 during midday trading on Monday. Shares closed at $88.68 on Tuesday.

Earlier in the day, DeBoer and Chief Financial Officer Chris Holzshu fielded financial analysts' questions about the transaction for more than half an hour.

During the call, DeBoer said as far as he knew, DCH hadn't been marketed to any other groups. He said there won't be a great need for capital expenditure because DCH is renovating many of its holdings, most of which will be finished by October's closing date.

During its earlier growth cycle, Lithia bought seven Colorado dealerships from the Moreland Automotive Group in what was the company's largest acquisition at the time, a $66 million cash and stock deal in spring 1999. Doug Moreland gained a spot on the Lithia board as part of the transaction, but left in October 2002.

In this case, DCH founder Shau-wai Lam, who owns 58,800 shares, or more than 2.4 percent of DCH's common stock, is expected to join the Lithia board later this year; Liang will report to DeBoer.

"You want management by good people with integrity," Heimann said. "You want them to continue to do well at things they're good at and make them even better."

Heimann, who served as DeBoer's mentor, said he expects more sizable deals in the future.

"Maybe not quite as big as this one," he said. "But we're going to see a lot more deals in eight to 10 stores or 15 to 20. The world gets more competitive, especially for new cars. If you've got eight, 10 or 15 stores, you don't want to have to fight the Internet and everything else. We can strengthen 10 or 12 stores that might be battling, but it's never easy."

DCH has been backed by publicly traded Hong Kong firm Wing On Co. International Ltd., whose holdings include retail stores.

"DCH wanted to (cash out) its 22-year investment," DeBoer said.

Shau-wai Lam's father, B.Y. Lam, founded Dah Chong Hong Ltd. in Hong Kong and opened an American subsidiary, DCH, in 1948. The company moved into the auto industry in 1977. The younger Lam moved to Los Angeles in 1979. In 1992, the Lam family and Wing On Group of Hong Kong jointly acquired the American subsidiary.

Reach reporter Greg Stiles at 541-776-4463 or Follow him on Twitter @GregMTBusiness, friend him on Facebook and read his blog at Edge.

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