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Hurricane Huizenga


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HURRICANE HUIZENGA

He hurtles to the front of the pack in auto superstores

Robert L. Rewey is a tough guy to impress. As Ford Motor Co.'s top sales executive, he hears plenty of blue-sky schemes for overhauling the industry, especially from the horde of outsiders eager to move into car retailing. By last summer, he was turning a deaf ear to public companies clamoring for a Ford franchise, even as every other major carmaker agreed to let them buy dealerships. So Rewey was skeptical when H. Wayne Huizenga, whose Republic Industries Inc. is the latest newcomer, dropped by for a chat in early October.

Huizenga got Rewey's attention, though, by describing how his Blockbuster Entertainment Group had transformed the mom-and-pop video-store industry. Then the Fort Lauderdale mogul, along with his longtime lieutenant, Steven R. Berrard, laid out plans to work similar magic on the auto industry. During subsequent meetings and phone calls, Rewey increasingly warmed to Huizenga.

By Oct. 23, when Huizenga, Berrard, and their team sketched out a business plan for a handful of key managers at Ford's headquarters in Dearborn, Mich., Rewey was convinced his franchises would be in good hands. Most reassuring, he says, was Huizenga's involvement. "I talk to a lot of people who are able to describe a grand vision," Rewey says, "but in the execution, it falls apart because it's turned over to somebody else." That afternoon, the two sides hammered out the framework of a deal. Shortly after the pact was announced on Dec. 20, Huizenga began scooping up Ford franchises from California to Florida.

Wayne Huizenga, whirlwind dealmaker, is back. And he's following the blueprint he already used to build two billion-dollar companies--making rapid-fire acquisitions to expand geographically, at the same time tapping new lines of revenue in the industry. That's how, starting with one garbage truck in 1962, he built Waste Management Inc. into a $1 billion company before leaving in 1984. That's how he built Blockbuster from a 19-store chain in 1987 into a 3,700-store giant with stakes in music retailing and film studios before selling it to Viacom Inc. for $8.4 billion in 1994. In the process, he revolutionized their industries. Now he's out to remake the $1 trillion auto sales and services industry. As he told shareholders in January in what's becoming a familiar quip: "We just want our share--50%."

QUICK STUDY. Huizenga and Berrard envision AutoNation USA, the Republic subsidiary through which they're taking on Detroit, as a cradle-to-grave auto distributor that will sell, finance, lease, rent, repair, and recondition cars. This sweeping concept dwarfs the ambitions of other new mega-retailers, among them Circuit City Stores' CarMax Group, former adman Carl Spielvogel's United Auto Group, and Driver's Mart Worldwide, a 21-dealer consortium. In fact, AutoNation borrowed the category-killer approach from CarMax but is running ahead with it, rolling out bright, technologically sophisticated stores with friendly, no-haggle policies.

Clearly, Huizenga's ambitions threaten the nation's 22,000 traditional dealers. Not surprisingly, some are hurling brickbats. "Ridiculous," snorts Martin J. "Hoot" McInerney, a Detroit area megadealer, of Huizenga's plans. "These aren't $3 videotapes where you put a high-school kid up at the cashier's stand." Huizenga, he says, will "lose his shirt."

Dealers aren't the only ones feeling the heat. If Huizenga succeeds, he could dramatically shift the balance of power in the industry. Says Christopher W. Cedergren, managing director of auto consultants Nextrend Inc. in Thousand Oaks, Calif.: "Deep down, this just scares the hell out of the manufacturers, because they fear losing control." The reason: Retailers have historically been part of the apparatus auto makers use to find homes for all the cars they crank out--even aging models and design miscues. Powerful new buyers could be a threat "if the relationship changes to where the retailer tells us what to build" or tries to dictate price, warns Robert J. Thomas, chief executive of Nissan Motor Corp. USA. "Huizenga alone," he adds, "has the power to quickly make the paradigm shift."

SILVER LINING. Other auto makers scoff at the fear that a single player could dominate. "The market is so huge, and there are so many dealers, that it just doesn't pose a problem," says General Motors Chairman John F. Smith Jr. Moreover, some manufacturers have discerned an upside to change: Superstore chains could help them streamline bloated dealer networks. Strict state franchise laws prevent them from forcing consolidation, but Huizenga's top-dollar bids provide a handy free-market solution. And as the frenzy escalates, some dealers who swore they would never sell are privately admitting they might.

Perhaps consumers have the most to gain. Huizenga has designed AutoNation to respond to long-standing complaints about traditional dealers. Store amenities include children's play areas and computer kiosks displaying pictures and descriptions of the cars in stock. There's no dickering over sale prices or trade-ins. Cars can be returned in seven days, no questions asked, and carry a comprehensive 90-day warranty. Consumers might even get a price break one day if Huizenga and his rivals succeed in squeezing out inefficiencies.

GOOD JUGGLER. Huizenga is off to a blazing start. On Jan. 1, Republic wasn't even in the new-car business. Now, it's the nation's largest dealer group, with 38 high-grossing stores with estimated 1997 sales of $3 billion (table, page 89). Not only that, but a Jan. 6 deal to buy National Rental Car System Inc., coming on top of Republic's November acquisition of Alamo Rent-a-Car Inc., will make Republic one of the largest U.S. rental companies. Future deals may include a major financing alliance, perhaps with Ford Motor Credit Co., and the purchase of an auto-servicing operation. In time, there may be an AutoNation outlet for spare parts. Huizenga's soup-to-nuts empire also includes two fast-growing chains of used-car superstores, Valu Stop, which will specialize in older, cheaper models, and AutoNation. As Berrard, who previously oversaw Blockbuster's warp-speed growth, boasted last December: "We've got used-car stores rolling out like Blockbuster stores."

As fast as AutoNation is moving, it's but one part of Republic, which continues to expand its existing waste-disposal and electronic security operations. And Republic is but one of Huizenga's businesses. He also presides over a sports empire that includes the Florida Marlins baseball team, the Miami Dolphins football team, the Florida Panthers hockey team, and Miami's Pro Player Stadium. And he's chairman of fast-growing hotel chain Extended Stay America Inc. That might be too much for most executives, but Huizenga is known for being able to juggle many complex issues. He also hires top-notch managers and lets them manage, though he keeps a handle on details.

But the key reason Huizenga can handle so much is his reliance on the 42-year-old Berrard, whom he began grooming as a partner in the early 1980s. Berrard came into his own as president of Blockbuster, where he closed many of its acquisitions and carried out the diversification strategy, and now he is both co-CEO of Republic and CEO of AutoNation. Both men do deals, plot strategy, and watch operations, though Huizenga obviously dominates strategy and Berrard implementation. When they're together, Huizenga often defers to Berrard on details or turns to him to enunciate AutoNation's vision.

In fact, it was Berrard who pushed to take Republic beyond used cars into virtually every facet of the industry. He had stayed at Blockbuster when it was sold to Viacom. But he rejoined his mentor last March, as soon as he was contractually free, and was soon scouting acquisitions and store sites.

It wasn't until October, when AutoNation opened its first store, an airy, $20 million used-car palace in Coconut Creek, Fla., that the AutoNation vision came into focus. There, customers can survey an inventory of 1,000 cars--two to three times the size of most other superstores. Huizenga plans 80 to 90 such stores by 2000, on top of spending up to $5 billion buying new-car dealers by then. He also talks of expanding overseas someday.

HOT STOCK. It was the launch of Huizenga's dealer buying spree that caused Detroit to sit up and take notice. He and Berrard spent all last summer and fall assiduously courting a handful of dealers who owned large groups of profitable new-car franchises. To endow AutoNation with the car smarts they lack, they're asking the sellers to sign on as managers, offering Republic stock options to those who remain at least four years. The dealerships will retain their old names, perhaps with the addition of an AutoNation logo. Says Huizenga: "There's nothing like having a person who's part of the team with his name on the door."

Why would top-flight dealers sign on? Keith M. Cowherd, who sold Phoenix-based Bell Dodge to Huizenga in January, says that wasn't his agenda--"I was realizing my life's dream." Still, the 46-year-old dealer was "at a crossroads"--strapped for capital to keep Bell growing. While Berrard kept coming back with better offers, Cowherd did enough research to decide that taking Republic stock was a good bet.

He's not alone. Big institutional shareholders--mesmerized by Huizenga's golden track record-- have been rushing to get into AutoNation on the ground floor, snapping up $905 million in private placements since Nov. 1. "There's some execution risk, but if there's a guy who can pull it off, [Huizenga] has got a better chance than anyone," says Larry D. Tashjian, managing director of Provident Investment Counsel, one of Republic's largest institutional investors. Republic's shares closed at 36 on Feb. 11, a dazzling 55 times estimated 1997 earnings. For 1996, the company posted a $59.5 million loss, including acquisition-related charges, on sales of $2.4 billion. But with all the businesses it's scooping up, analysts now expect revenues to hit $8.3 billion this year. William Genco of Merrill Lynch & Co. in late January forecast earnings of $572 million on sales of $16.6 billion by 1999.

BIG RISKS. Early in AutoNation's evolution, Huizenga decided to fold it into Republic, rather than take it public. That has allowed Republic's profitable garbage and security businesses to offset startup costs. Says Stacy Gray, an analyst at First Analysis Securities Corp. in Chicago: "Today, what's providing earnings is solid waste."

And what's enabling Huizenga to gobble up big chunks of the car business is Republic's pricey stock, which he has used to make nearly all his recent purchases. To keep up the spree, he has to keep the stock price up--and to keep the stock price up, he's got to keep up the ultrafast growth. "It's a high-wire act," one longtime associate admits.

Indeed, the stock's giddy heights might give investors pause. Huizenga is, after all, buying into the slow-growth, low-margin auto business. For now, the high stock price is enabling him to buy a stream of future earnings without diluting Republic's shares. But if the stock falls, acquisitions would be costlier and harder to come by, which could further hurt the stock price.

The risks are substantial. The auto business is prone to sharp downturns, and financing tens of thousands of unsold cars can quickly bleed millions from an unwary operator. On top of that, Huizenga is buying auto assets and real estate while the market is high. And some industry experts question whether AutoNation can make money. Says Donald L. Keithley of J.D. Power & Associates Inc.: "It will be wildly popular and sell a lot of cars. But is it enough to cover the expense structure?"

Huizenga's detractors snipe that he is better at building big companies than at operating them long-term, when they say his trademark consolidation strategy falters. "He ran [Blockbuster] up and unloaded it," says rival Spielvogel. "Now Viacom is busy closing stores." But in fact, few problems at Huizenga's old businesses can be traced to him. Waste Management, now WMX, is currently facing difficulties--but Huizenga left 13 years ago. As for Blockbuster, at the time of the acquisition, Viacom drastically wrote down its tape inventory. As a result, the chain's margins looked better for the next year, then appeared to drop substantially. But same-store sales, a key barometer of retail health, have consistently grown since the acquisition.

Viacom did have to close 10% of Blockbuster's music stores, because Huizenga scooped them up when that business was red-hot and it has since slumped. And Discovery Zone, Blockbuster's 1993 foray into indoor playgrounds, is also a blot on his resume. There, rapid expansion was a disaster because of poor sites and operations, and the debt load swelled. The company filed for bankruptcy protection in March, 1996, and in December filed a reorganization plan that resulted in a $40 million write-off for Viacom.

Given Huizenga's far more prominent successes, Wall Street seems to forgive him much that other chief executives would be pilloried for--such as using small boards stuffed with friends and associates and cutting deals between his public and private companies. When Huizenga's newly public hockey team, the Florida Panthers, announced plans in December to buy two Fort Lauderdale hotels for 8.4 million shares, reporters quickly pointed out that the properties were 80% owned by a partnership in which Huizenga and other associates have interests. But rather than being hurt by the appearance of an inside deal, Panthers' stock more than tripled, from November's $10 offering price to $35, on the perception that Huizenga is developing a "sports and leisure" company. Independent hospitality consultant M. Chase Burritt of Ernst & Young says the valuation of the hotels, based on a return on investment, "isn't indicative of an insiders' deal." And Huizenga is "not screwing shareholders," says Lesa Ukman, president of IEG Inc., which tracks sports marketing. "The conflicts of interest are there--he's made his friends and family very rich--but the average Joe Shareholder got rich, too."

PLENTY OF PRACTICE. The personal style with which Huizenga has broken into Detroit's big leagues, winning over dealers and carmakers alike, is one he's been perfecting since 1962, when as a 25-year-old college dropout, he started pestering Wilbur Porter, a Fort Lauderdale trash hauler, to sell him a collection route and a beat-up truck. When Porter finally gave in, Huizenga paid him $5,000 borrowed from his then father-in-law. Five years later, he linked his small company with a Chicago relative's garbage business to form Waste Management and was on his way to his first billion.

Three hallmarks were already evident: Huizenga liked to do business in person. He used his stock as currency. And he moved fast. Through it all, he has also proved himself a master of sizing up new situations. Given a career full of achievements and monumental personal wealth, why does he feel compelled to put those skills to work taking on yet another industry? "Friends say, `You've got a great reputation out there, you should just retire after Blockbuster,"' he says. "But that's what gets the adrenaline going--that's why people climb mountains....Life would be a lot simpler if...we didn't have to set the world on fire and reinvent the used-car business. But it's a huge challenge, and if we can make this thing work--and I think we can--it's another Wal-Mart."By Kathleen Kerwin in Detroit and Gail DeGeorge in Fort Lauderdale, with David Greising in Coconut Creek, Keith Naughton and Bill Vlasic in Detroit, and Larry Armstrong in Los AngelesReturn to top


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