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Planes, Trains, and Automobiles: Buffett Adds Car Dealership to Berkshire's Collection

Berkshire is entering the fragmented auto-dealership arena in the latest example of a family-owned business turning to Buffett to secure the company's future.

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While we had expected Berkshire Hathaway to put more money to work this year, given the growing cash hoard on its balance sheet, we were a little surprised to see CEO Warren Buffett allocate capital to a car dealership. The purchase of Van Tuyl Group, the largest privately owned auto dealership group in the United States, moves Berkshire into the business of selling cars, which many view as having relatively few competitive advantages. What may have attracted Buffett to the business is that the dealer sector (in the view of our analyst covering the industry) is the best part of the automotive supply chain from a competitive advantage perspective, with all the publicly traded firms having developed narrow economic moats around their operations.

Van Tuyl operates in a highly fragmented industry, with the 10 largest dealers accounting for less than 10% of new-vehicle unit sales the past several years, providing Berkshire with an opportunity to put additional capital to work in the business. The deal also expands the brand-building exercise Buffett hinted at during the annual meeting--after MidAmerican Energy was renamed Berkshire Hathaway Energy and the firm's real estate brokerages were rebranded as Berkshire Hathaway HomeServices--with the car dealership group's name changing to Berkshire Hathaway Automotive once the deal closes.

While the terms of the deal were not disclosed, Van Tuyl is expected to generate close to $9 billion in revenue this year through its 78 independently operated dealerships and more than 100 franchises in 10 states. This is not quite half the $19 billion in revenue our analyst expects market leader AutoNation to generate this year. If the economics of the two businesses are similar, we would put a value of around $2 billion on Van Tuyl (based on an estimated value of about $6 billion overall for AutoNation). The deal is also the latest example of a family-owned business turning to Buffett to secure the company's future.

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Greggory Warren does not own (actual or beneficial) shares in any of the securities mentioned above. Find out about Morningstar’s editorial policies.