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Republic's Master Plan
by Jim Surowiecki (Surowiecki@aol.com)

At REPUBLIC INDUSTRIES's (Nasdaq: RWIN) annual shareholder meeting last Tuesday, the entertainment came from more than just the company's ambitious projections. The meeting featured clowns, music, stage shows -- everything but fireworks. It was a long way from the staid atmosphere of most shareholder gatherings, but then Republic's co-CEO Wayne Huizenga has made a career out of dabbling in the unconventional.

Of course, it's also possible that the bells and whistles were intended to distract investors who are a little bit anxious about recent court challenges to Republic's aggressive acquisition of car dealerships across the country. If Blockbuster founder Huizenga and fellow CEO Steven Berrard are concerned at all, they showed not a trace at the meeting.

At the core of that strategy is the dramatic transformation of Republic from a holding company with interests in the solid waste and electronic-security industries into the nation's largest retailer of automobiles. Two years ago, Republic did not own a single auto dealership. But in the last six months, the company has gone on a buying spree, exchanging hundreds of millions in stock for nearly a hundred dealerships to feed AutoNation USA, a chain of used car superstores. Even the shareholder festivities did not slow Republic down, as the day after the shareholder meeting Republic acquired dealerships in Tampa and Palm Beach.

Republic currently operates ten AutoNation outlets and has plans to open another 13 before the end of the year. Huizenga insists that there will be 80 to 100 AutoNation stores by the year 2000, at least one in each of the nation's 50 major markets. Although AutoNation is building its business around the sale of used cars, Republic is also expanding strongly into the new car business and is the country's largest single owner of new-car dealerships.

Republic's ride so far has not been without a few bumps. Sales in January and February were below expectations and a recent article in Business Week suggested that sales at some stores were only half of the company's targets. Those numbers preceded the nationwide slowdown in auto sales that the Big Three reported for March, meaning it could get worse. In coming months AutoNation will also find itself competing directly with CarMax, the superstore chain owned by CIRCUIT CITY (NYSE: CC). While Republic's emphasis on top-of-the-line service and a mellow sales approach has paid dividends so far, it remains to be seen how that will stack up against CarMax's prices, which are often dramatically lower.

The wild card in Republic's future is its relationship with the auto manufacturers themselves. Republic currently has working agreements with both GENERAL MOTORS (NYSE: GM) and FORD (NYSE: F) that allow it to acquire car and truck dealerships across the country. Neither company has voiced any doubts about the long-term effect of the consolidation of car retailing on the auto industry. A week ago, Ford chairman Alex Trotman said, "We think what [Huizenga's] doing is really, essentially what the customers are asking for." Indeed, Ford appears to be taking a page out of Republic's playbook, floating a plan to buy 18 Ford and Lincoln-Mercury dealerships in the Indiananapolis area and consolidating them into four or five megadealerships.

Other automakers, though, are more skeptical about Huizenga's plans. The company is still talking with NISSAN and CHRYSLER (NYSE: C), but it has had to go to court with both HONDA and TOYOTA, which both have rules restricting the number of dealerships any one entity can own. Neither wants to allow Republic, or anyone else for that matter, to control a substantial portion of their sales in the United States. In April, Toyota filed a petition with the Texas Motor Vehicle Board seeking an injunction to block Republic from acquiring a Houston dealership. Toyota argued that the acquisition was against the public interest and that it would damage Toyota's "representation in the marketplace." Republic plans to acquire 59 different Toyota dealerships would give it control of almost a fifth of Toyota car sales in this country.

Toyota's petition was prompted by Republic's refusal to sign any agreement limiting the number of Toyota/Lexus dealerships it could own or abide by a nine-month waiting period between acquisitions. On Friday, an administrative judge ruled that Republic could not go ahead with the purchase of the Houston dealer until the Motor Vehicle Board handed down its decision. Although the decision was only procedural, investors still reacted badly on Monday, with the company's shares dropping 6%. The company, though, remained unflappable. "We believe ultimately that we will prevail," spokesman Jim Donahue said. "There is nothing in the law that prevents us from acquiring [the dealership]. You are looking at the changing of an entire industry."

It's precisely that possibility that has some automakers concerned. While the impact on consumers of dealership consolidation should be benign, it's possible that a Republic five or six times the size it is today could bring significant price pressure to bear on manufacturers. More intriguingly, automakers are also worried that if Republic succeeds in reinventing itself as a brand name, the value of their own brands will suffer. Honda, for one, mentioned that possibility when it filed suit against Republic two weeks ago in federal court. While that concern seems rather overblown -- does anyone really see FOOT LOCKER as a brand in the same way as NIKE (NYSE: NKE) is a brand? -- Honda's lawsuit is potentially serious business. Unlike Toyota, Honda is seeking to enjoin Republic from acquiring Honda and Acura dealerships throughout the country. The company charged that Republic planned to acquire 60 such dealerships in major markets, which would give Republic 20% of Honda sales in the U.S., even though there are a total of 1,300 Honda/Acura dealers.

Honda only filed suit after negotiations with Republic had proved fruitless. While Honda's description of Republic's plans seems perfectly accurate, and while Republic's acquisitions will almost certainly put smaller family-owned dealerships out of business, it's difficult to see what grounds there are for a federal lawsuit -- particularly one not grounded in antitrust concerns. Although Honda charged that Republic refused to recognize company rules restricting the number of dealerships any entity can own, there are no federal laws requiring Republic to abide by agreements it did not sign. While Honda is certainly free not to sell its cars through Republic or AutoNation, preventing another company from purchasing independently owned franchises is a hard thing to convince a judge to do.

Republic's future may depend on this test of wills with automakers. An important element in the success of superstores is their ability to provide consumers with the full array of product lines, which will give manufacturers a certain amount of leverage in dealing with Huizenga. At the same time, if Republic can corner enough of the retail space in major markets, it will its own real leverage. Of course, even if it does, Republic will always be subject to the same concerns as those faced by auto manufacturers. Whether you're retailing the cars or making them, you're stuck in an industry that investors persist in seeing as cyclical. What that means for a company that is currently growing on the basis of stock-fueled acquisitions is anybody's guess.

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