Slumping Stock May Slow Republic’s Expansion Pace

Republic Industries Inc.’s shares are getting drubbed, threatening to stall billionaire Chairman H. Wayne Huizenga’s acquisition spree.

The company, which has grown rapidly by buying auto dealers and waste haulers, trades at about $20.50. That’s the lowest since last July and 55 percent below its record high of $44.37-1/2 in January.

Investors are concerned about the effect of Toyota Motor Corp.’s and American Honda Motor Co.’s efforts to curb Republic Industries from buying more of their dealerships, as well as boom-and-bust cycles in auto sales. Cheaper stock makes further acquisitions tougher because Republic has to issue more shares, making car-dealership owners reluctant to swap their business for a fallen stock.

“It feeds on itself,” said Morton Richter, president of Richter Asset Management, whose firm sold its 162,000 Republic shares held at year’s end. “The more difficult it becomes to make transactions, the lower the stock goes.”

Using Republic shares as the currency for buying other businesses, Huizenga has transformed Fort Lauderdale, Fla.-based Republic Industries in two years from a little-known trash hauler with $200 million in market value to a collection of auto retailing, waste-collection and security services businesses with a market value of almost $7.1 billion.

Since December, Republic has used its stock in part to finance a $2.5 billion acquisition of National Car Rental System, a $650 million acquisition of the AutoNation USA chain of used-car superstores, a $269 million purchase of waste company Taormina Industries and has bought more than two dozen auto-dealer groups with about $6 billion in revenue.

(Earlier this month, Republic struck a deal to acquire five dealerships from Spokane’s Appleway Group for more than $42 million in Republic stock.)

“Huizenga’s style is a steamroller, blitzkrieg approach,” said Sheldon Sandler, managing director in corporate finance for Ladenburg, Thalmann & Co. “Now you have a limitation on his growth.”

Sandler, who specializes in the auto industry, said Republic has been paying 20 percent or more than other companies to buy the best-run U.S. auto dealers.

Spokesman Jim Donahue said Republic will continue to make acquisitions, using stock or cash.

With a richly valued stock, Republic can issue relatively few shares, adding earnings from the acquired businesses to its bottom line. A declining share price reduces the earnings boost as Republic is forced to issue more shares for an acquisition, thus diluting its per-share earnings.

For instance, last month, Republic agreed to issue roughly 3 million shares for two auto-dealer groups with $251 million in revenue. In February, with its stock price much higher, it issued far fewer shares - 1.7 million - to buy the larger Wallace Automotive Group, with $300 million in revenue. Republic hasn’t disclosed profits from these car dealers.

The company earned $28.9 million, or 8 cents a share, on $1.5 billion in revenue in the first quarter. It had a loss of $59.5 million, or 25 cents, on revenue of $2.37 billion in 1996.

Republic also could face a roadblock from Japan’s two biggest automakers. Toyota said in April it wants to limit Republic to seven Toyota franchises and wants Republic to wait nine months between purchases. Honda on May 7 sued to stop Republic from buying more Honda and Acura dealerships.

“This is going to be a very tough, uphill fight for Republic,” said analyst Robert Friedman of Standard & Poor’s Equity Group. Even if Republic ultimately wins the cases, the delays could slow Republic’s efforts to cut costs and woo new customers through its market dominance, he said.

Republic executives are undaunted, and say the company’s growth remains on track. Republic expects $10 billion in revenue this year and $15 billion next year, Huizenga said at last month’s annual meeting of shareholders.

“All we can do is post results on the bottom line and grow the company, which is precisely what we are doing,” he said.

Republic is expected to earn 67 cents a share this year and $1.09 a share in 1998, according to a survey of seven analysts by IBES International Inc.

Some analysts are betting that Huizenga will succeed in consolidating a highly fragmented industry. His track record includes turning trash collector Waste Management Inc. and video rental chain Blockbuster Entertainment Corp. into industry leaders and richly rewarding investors along the way.

Republic already has built the largest auto-dealer company in less than six months, said Maryann Keller, an analyst at Furman Selz LLC. “The concept is still viable,” Keller said. “By bringing corporate operating skills to bear in operating dealerships, there are economies of scale” such as cutting overhead costs and the purchase of advertising.

Company officials said they believe Republic’s collection of auto businesses will help cushion it from a recession, as, for example, used-car sales and servicing might increase when new-car sales decline.

Don’t count on it, Sandler said.

“If there’s a big downturn, there’s going to be a slaughter,” he said. “This is still a cyclical business.”