Our sources have told us, and the Wall Street Journal confirms, that GPB Capital Holdings has taken the decision to sell all of its remaining Prime Automotive dealerships. Given the strength of the automotive market, now is a great time to sell.
While Scientologist and GPB Capital’s sole owner David Gentile has had no active role in GPB Capital after stepping down as CEO, his approval would have been necessary.
The Wall Street Journal:
GPB Capital Holdings LLC, whose founders face criminal fraud charges related to the firm’s private-equity operations, is shopping a major piece of its automotive dealership portfolio, people familiar with the matter said.
The New York firm is trying to sell what remains of the Massachusetts-based Prime Automotive Group, which largely consists of dealerships in New England. GPB acquired a majority interest in Prime in 2017, when the group included more than 20 stores, for more than $235 million. The firm made a separate deal for related real estate, a legal filing states.
The move involving one of the firm’s biggest investments comes after GPB’s GPB Automotive Portfolio LP said in a May regulatory filing that there was substantial doubt that the business would survive. While a 10-month extension of a pivotal M&T Bank Corp. lending agreement in late June eased those doubts, coming up with cash remains a focus for GPB Automotive, filings indicate.
The irony here is ferocious. Just as the Prime Automotive dealerships are sold off, David Gentile, Jeffry Schneider, and Jeff Lash — the GPB executives who bought the dealerships and bundled them into GPB’s Automotive Fund — will be starting their criminal trials in US Federal Court.
Update: Our sources tell us that the main contender to purchase Prime Auto appears to be Lithia Motors Inc.
Lithia Motors (LAD) just closed on Rock Honda out here in Los Angeles. Rock Honda is a massive dealership that dominates Honda sales in SoCal. Lithia’s stock rose on news of the Rock Honda acquisition. From the linked Investors Observers article:
Shares of LAD increased 0.97% to $339.14 as of Tuesday at 12:27pm… Lithia’s acquisition of its most recent Honda dealership continues the company’s fast-paced growth trajectory and expands the reach of its omni-channel network. The $170 million in annualized revenues that Rock Honda is expected to generate will bring Lithia’s total expected annualized revenue to over $4.9 billion. This keeps Lithia on track to meet their 5-year plan of achieving $50 billion in revenue by 2025.”
Once court-appointed monitor Joe Gardemal took over GPB Capital Holdings, the decision to sell Prime Automotive made obvious financial sense to preserve some value for GPB investors.
Highline Management Inc., the operating arm of GPB Capital formed in January 2020, will be instrumental in the sale of Prime. GPB Capital explained the function of Highline as follows:
Highline Management, Inc. (“Highline”) was formed in January 2020 to assume the day to day duties and responsibilities of GPB with respect to the management of the business affairs, operations and financial reporting of the various limited partnerships sponsored by GPB as well as the Portfolio Companies.
We see the sale of Prime Automotive as the beginning of the end for GPB Capital Holdings. Our prediction is that the rest of the assets will be sold off and the corporations which compose GPB Capital will be wound down.
From our perspective, GPB Capital’s only other valuable assets are in its healthcare software and biotech portfolios. This part of GPB was helmed for many years by GPB exec Evan Myrianthopoulos. Our sources tell us Myrianthopoulos is no longer with GPB Capital. His LinkedIn page confirms this.
With the departure of Evan Myrianthopoulos, none of the early GPB Capital executives. The C Suite at GPB Capital has always been a revolving door with very high turnover.
Correction: We had written that Jovan Sijan was still onboard as a GPB Capital exec. One our readers stated that the Form 10 indicates he was paid a severance in June 2021. A check of his LinkedIn page verifies this. With the departure of Sivan, none of the early GPB Capital executives remain in place. It appears that Highline Management purged the old guard.
Aside from the auto dealerships, healthcare software, and biotech, GPB Capital’s other acquisitions made during its peak years still make no rational sense to us. For example, GPB Capital got into cold storage. This simply means GPB Capital financed the construction of giant freezer warehouses on the docks of New Jersey where the catch from the fishing boats is frozen. How does freezing fish make sense as a market to invest in for a company that promoted itself as being one of the largest owners of auto dealerships in America?
GPB Capital invested in waste management and later reported losses of 80% in that market. Likewise, the companies purchased from Gentile’s fellow Scientologists — at what appear to be inflated prices — seem to have very little value and look more like favors than actual investments. We have the same view of the tech debt GPB Capital purchased. The truth will emerge when, and if, GPB Capital sells these holdings. Our prediction is that GPB will lose money on these investments that did not relate to its core markets.
The lawsuit the Commonwealth of Massachusetts filed against GPB Capital noted:
As time went on and GPB Capital raised more money, it was unable to deploy its capital efficiently.
GPB Capital couldn’t spend its $1.8 billion fast enough. To this point, we previously reported on how Scientologist David Gentile, the sole owner of GPB Capital Holdings, offered his fellow Scientologist Larry Feldman anywhere between $70-$105 million in financing to begin construction on Feldman’s Riverwalk Development. These figures were mentioned in a July 2018 article in Business Observer article. As Tracey McManus of the Tampa Bay Times reported in March 2020, Feldman exited the Riverwalk project. Feldman’s exit was inexplicable given that Feldman had invested many years and tens of millions of dollars into the project.
Is it possible that David Miscavige ordered long-time Scientologist Larry Feldman to “take one for the team” so that the $105 million maximum available in liquid cash from GPB Capital could be diverted to allow Scientology to buy up as much property as possible in Downtown Clearwater? The Church of Scientology denies but we give zero credibility to a Scientology denial of anything. The facts will eventually emerge on where all the cash came from.
The strange story of the Israeli straw buyer Itzhak Zano documented by McManus is a story that is not finished. Based upon the work of McManus, we published our own article here on our blog: 2017 – Scientologist-Controlled LLC’s Purchase $103 Million in Downtown Clearwater Real Estate in Cash: Where Did the Money Come From?
We take the same position now as we did in our previous article:
A leaked FBI Intelligence Bulletin mentioned “more than $100 million in wire transfers” that came from a Russia-based company and flowed into the coffers of a NYC private equity firm:
We asked if this New York-based private equity firm could be GPB Capital Holdings whose sole owner is Scientologist David Gentile. In support of our question, we cited the ties of both David Gentile and GPB Capital to the purported Russian mobster Michael Cherney via his daughters Rina and Diana Chernaya. Gentile also has ties to Cherney’s US business agent Robert Kessler. Indeed, Chernaya and Kessler money were behind GPB Capital’s first major VW car dealership.
In our previous article on the FBI Intelligence Bulletin we were careful to state that no conclusions could be made absent solid evidence. We will therefore continue to watch for any developments.
We have documented curious ties between Scientologists and the UAE. Reuters reported on June 21, 2021:
DUBAI, June 30 (Reuters) – More than 500,000 firms in the United Arab Emirates (UAE) must disclose their ultimate owners from Wednesday or face penalties, as the Middle East financial hub tries to avoid inclusion on a dirty money watchlist…
We are watching this story to see the names of Scientologists with hidden financial ties in Dubai emerges. We have a very short list of likely Scientology OT’s. Our theory is that some dirty money has flowed from Dubai and found its way into US ventures owned, or nominally controlled by, Scientologists. We have traced money going into the Church of Scientology from Islamabad; Medellin; Cyprus; Israel; Russia; Taiwan; Buenos Aires; Venezuela; Mexico; and many other places.
We will not be surprised if money from Dubai appears in GPB Capital’s offshore accounts. We have identified money flowing into GPB Capital money from the Cayman Islands: Brazil; Ireland; and Russia via Florida.
In 2019, the healthcare and biotech assets of GPB Capital were transferred to GPB Capital’s spin-off Austin Lake Technologies. GPB VP Mike Frost took over as CEO of Austin Lake Technologies. GPB Capital’s recent Form 10-A of July 21, 2021 says of Mike Frost:
Mr. Frost joined Highline in September 2020 from Austin Lake Technologies, where he was the founder and Chief Executive Officer from August 2019 until joining Highline. Austin Lake Technologies, spun out of GPB, was launched in 2019 and was responsible for overseeing the tech-enabled services and healthcare technology companies owned by two of GPB’s managed Partnerships. Mr. Frost joined GPB in early 2015 until the spin out of Austin Lake in August 2019.
This is our GPB Capital update and review for the present. We await further developments.
As part of our document collection on GPB Capital we post the Alabama lawsuit below. Alabama sued GPB Capital on behalf of its residents who were harmed by investing in the company. Alabama did a great job of detailing how GPB Capital was created from the beginning as a way for Gentile, Schneider, and Lash to collect excessive fees at every turn from unwitting investors. Gentile, Schneider, and Lash are poster boys for the old Wall Street maxim: Pigs get fat; hogs get slaughtered.
GPB_Capital_Complaint_AlabamaCategories: The Scientology Money Project
Jeff, another good update. I’m copy/pasting my comment from your last post about whether this is actually a good time to sell dealerships; I am not at all certain that it is.
A minor point: you say “Gentile, Schneider, and Lash are poster boys for the old Wall Street maxim: Pigs get fat; hogs get slaughtered.” As an old Wall Street guy who knows a lot of old Wall Street maxims, I think you’re misapplying the quote. This one is actually about enforcing selling discipline. If you stay too long in a stock when it’s nearing the top, you might sometimes get the most profit, but you might also take a big loss if the stock suddenly drops in value from a missed quarterly earnings report, etc. So this one is about getting comfortably fat, but not trying to be the fattest hog on the farm, because you might be the first to slaughter.
There’s not another equally cool-sounding maxim, but I might point you to the classic 1940 text, “Where are the customer’s yachts? or, A Good Hard Look at Wall Street” which was written by a successful broker. People still occasionally say “Where are the customer’s yachts?” I heard that a few times, but as commissions and fees continually go down, most foot soldiers on Wall Street are making far less than they were 20 years ago (management continues to pay themselves first, these days at the expense of the troops, however).
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What I said in the previous post about whether this is a good time to sell dealerships:
It’s not entirely clear that this is a good time to sell dealerships. Sure, there’s a shorage of cars, so dealers are marking up units with significant premiums over sticker price. However, looking at monthly unit sales, the numbers are bouncing around a bit. They had rebounded to levels near previous years in comparable months in the winter and spring, but the bottom seems to have fallen out in July, most likely due to low dealer inventory, driven by component shortages. Looking at the St. Louis Federal Reserve domestic vehicle production history, units continue to drop, with July production coming in at a monthly rate about 1/3 the production rate five years ago. As you know, much of the bottleneck for production at this point is availability of semiconductors, most of which are custom-made parts and not high-volume generic parts like memory chips. It’s harder to get on the production schedule for that type of chip once things have gone sideways in the fab. So I’d expect that semi supply issues are going to persist at least through the end of 2021, perhaps until the fall of 2022 when the cutover to 2023 model years starts. Unfortunately, the high end luxury models have the most different chips, and are thus most likely to see continued production problems. And those are the most profitable cars for both dealers and manufacturers. I’d thus suggest that this could actually be the WORST time to sell dealers, not the best.
Another tidbit:
Why would GPB think of investing in cold storage warehouses? I have not researched GPB’s specific acquisitions in that sector, but I can give you a high-level investment thesis that suggests that the sector has some long-term appeal.
For a long time, the grocery business has seen an increase in the percentage of value that goes through refrigerated and frozen food. This is mainly from two strong long-term trends that probably have not yet peaked. First, there’s the rise of the microwave oven over the last 30 years, which can heat the food, and second, there’s the desire for fresher food and more prepared meals. Even lower-income people are willing to pay more for Stouffer’s frozen lasagna ($7-$9 for a 6-serving tray) in a family dinner than they would for canned Chef Boyardee lasagna ($1.00 a can, need 3-4 cans for a family dinner). I remember eating Chef Boyardee canned lasagna as a starving college student, and after graduation, I resolved, “never again.”
People are willing to pay more for more restaurant-like quality because they can avoid a trip to a Quick Service restaurant (low-end restaurant chains with table service like Applebee’s, IHOP, Chili’s, etc.). Those chains are losing business in recent years for the first time ever, to either fast food (McD’s, etc.) or to heat-and-serve microwave meals or other convenience-oriented home meal prep. Note that “home meal prep” is not the same as “cooking.”
The key to enabling this major trend is a robust and predictable “cold chain” that stores goods with energy efficient facilities, and is able to ensure that perishables get from warehouse to customer with minimal losses due to product spoilage. Non-refrigerated produce is typically sourced from local wholesale produce markets, so the supply chain issues after product gets to market are minimal — it goes straight to the store the day after it arrives from the farm. But all the major food retailers have a separate set of warehouse facilities and trucks for frozen/refrigerated prepared foods that are separate from the distribution network of dry goods coming from other distribution centers. That’s called the “cold chain.” It works better to have two separate distribution networks than it does to try to combine things.
At the same time, there is a long-established move away from red meat in the US. Per-person consumption of beef is down by half over the last 40-50 years, and (IIRC), pork is also down significantly. Chicken is up, but that industry is all controlled by a handful of big companies like Tyson and Perdue, which control not only production but distribution. The other growth protein is seafood, which is a highly fragmented market, and thus may be ripe for a smart guy with lots of money to consolidate parts of it.
So if you pull together all the threads, there’s an opportunity for a smart player to establish a potentially new category in the cold chain of “head end capture” of frozen seafood, grabbing product at the dock and storing it and forwarding it through the cold chain, both to processors and directly to stores. You could get something resembling monopoly power in a market by building a large enough facility, where you’d get great energy efficiency and breadth of product line, so you could squeeze smaller competitors . Even if you didn’t have a monopoly in a local market, your larger facility would have more room to take in bountiful catches during seasonal peaks than smaller facilities. Lather, rinse and repeat for other major fishing ports, and you could have a fairly successful business that owns an important niche in the increasingly important cold chain. And when you “own” a niche, you are more profitable than similar businesses in highly competitive markets
The above story (with credible supporting data) would get me interested in doing some more work on cosidering an investment in the sector. From there, I would have to spend time figuring out whether doing this in NY was the best first location, and whether the GPB management team could pull it off, and whether they could raise enough money to repeat the model across the other key seafood landing ports in the US. Management competence and ability to execute on their plan is at least as important as the opportunity, but the above should clarify that this is not a horrible idea and might even be a good one. It’s most likely going to be better than buying dealerships or waste management companies, the two key parts of the GPB Capital strategy. Both of those industries were long ago “rolled up” by sophisticated acquirers, so the only companies on the market today are the ones that have been picked over.
I have no idea whether the company management GPB put in place would be capable of pulling off a win. I have no idea what the numbers of that business were or what they could be And I have no idea whether GPB overpaid for anything they acquired. Given what we’ve seen in other sectors, they probably did and their management probably couldn’t. Even before the indictment, and even without knowing that GPB was run by Scientologists, I would never have seriously considered putting money in their fund. The fact that the main sales channel was tiny broker/dealers I’ve never heard of is by itself sufficient reason that I would have passed, with about five minutes’ research.
But at a high level, developing a well-chosen cold chain participant could be a very smart investment.
Thank you for your analysis John P. Astute and on point as always.
Here are some things that I think help to contextualize my articles:
1. It is always better to buy a business than to build a business. Most of Prime Auto dealerships were purchased from David Rosenberg a very well respected figure in the car dealership business in the Northeast US. His father was Ira Rosenberg, a legend in the car dealership business. David Rosenberg grew up in the business. He has all of the connections with the auto manufacturers.
2. David Gentile and his partners purchased strong established dealerships from David Rosenberg and allowed him to remain onboard as the CEO of Prime until there was a falling out and Rosenberg sued GPB. Rosenberg went to the SEC and was one of the first to raise a red flag about GPB Capital. The first person to call GPB a Ponzi scheme was Patrick Dibre another automotive veteran who worked for GPB and then sued them. As an aside, in our view, Gentile lead with his chin and his hands down when he sued Dibre. This is the wrong guy to sue unless you want to get punched back hard in court. Dibre did that when he called GPB a Ponzi scheme in a court filing.
3. Prime Auto owns many established marquee dealerships in great locations. These dealerships have everything in place for a turnkey purchase: Dealer sales on the lot; internet sales departments; service, financing via the manufacturers, etc. These are all name brand dealerships.
4. My sources tell me a few major players in the auto dealership business are looking at Prime. The main contender appears to be Lithia Motors Inc. Here is Lithia’s ranking in 2018:
2018 total new retail vehicles 2018 rank
AutoNation Inc. 310,839 new cars sold
Penske Automotive Group Inc 236,000 new cars sold
Lithia Motors Inc. 184,601 new cars sold
Lithia Motors (LAD) just closed on Rock Honda out here in Los Angeles. Rock Honda is a massive dealership that dominates Honda sales in SoCal. Lithia’s stock rose on news of the Rock Honda acquisition: https://www.investorsobserver.com/news/stock-update/lithia-motors-lad-stock-rises-after-acquisition-of-california-honda-dealership
From the article: “Shares of LAD increased 0.97% to $339.14 as of Tuesday at 12:27pm… Lithia’s acquisition of its most recent Honda dealership continues the company’s fast-paced growth trajectory and expands the reach of its omni-channel network. The $170 million in annualized revenues that Rock Honda is expected to generate will bring Lithia’s total expected annualized revenue to over $4.9 billion. This keeps Lithia on track to meet their 5-year plan of achieving $50 billion in revenue by 2025.”
5. The money in the automotive sector, as you know, comes from service, financing, extended warranties, etc. There is cash flow. John Staluppi said in a 2019 interview, iirc, that his dealerships serviced one million cars in a year. That is a lot of oil changes, tires, tune ups, etc. Staluppi, who some say was a made man in the Colombo family when he was young, denies it. He made a killing selling Hondas during the energy crisis of the late 1970’s and continued on in cars. Staluppi later ventured into super yachts. His estimated worth is >$500 million.
6. From Statista: In 2020, the auto industry in the United States sold approximately 14.5 million light vehicle units. This figure includes retail sales of about 3.4 million autos and more than 11 million light truck units. https://www.statista.com/statistics/199983/us-vehicle-sales-since-1951/
7. Other car facts:
* The auto industry accounts for approximately 3% of the total gross domestic product of the US
* Ford’s signature F-Series light truck is the all-time best-selling car model in the US.
* Since 2015, Toyota has been the top-selling non-domestic automaker in the US.
* There will be 287.3 million cars registered in the country by the end of 2020.
* A total of 843,296 pickup trucks and SUVs were sold in the first month of 2020 in the US.
ref: https://fortunly.com/statistics/us-car-sales-statistics/#gref
John P., re: Pigs get fat, hogs get slaughtered: While it applies on Wall Street to selling discipline as you say, the popular meaning outside of Wall Street has a different connotation.
Out here it means that you get slaughtered if you get too greedy. It means you should have quit while you were ahead. Examples:
1. A guy robs a bank and makes a big score. He doesn’t get caught so he robs three more. He then gets shot and killed by the a bank security guard robbing his fifth bank.
2. A woman is up $100,00 in Vegas. She should take her money and walk away form the tables. Instead, she keeps pushing and quits after she loses her $100,000 in winnings and another $50,000 of her own money.
3. A company has a successful business that throws off a lot of cash. Company decides to expand into an unrelated business where it has no experience. I know too many painful stories of this. I watched a gazillion dollar business, a client of mine, go down hard when it went into an unrelated business where it got in way over its head. Cannot give details other than to say the medical surgical equipment business is not a place for the inexperienced. The FDA and the market will eat you alive for mistakes. So much money wasted. They should have stayed in their very safe business — which was not glamorous but was a necessary and good product — and bought a few competitors.
4. A hypothetical guy, say he’s a Scientologist, borrows $1.7 billion to buy apartment buildings in second tier areas. He confuses social media success with earnings. Things don’t go his way. He learns the hard way that debt is leverage on the way up and deadweight on the way down.