9:28 am, January 25, 2023
The Americans are coming – and they want to feast on undervalued UK car dealer groups.
That’s the opinion of stock broker Zeus Capital which has highlighted the ‘good value’ listed car dealers like Lookers, Pendragon and Vertu currently represent.
The broker’s comments have been echoed by motor trade deal makers who highlight the ‘cheap’ price of listed groups in the UK as too tempting for overseas investors to ignore.
The comments come after reports US-based franchised dealer group Lithia Motors is in advanced discussions to buy Jardine Motors for £300m.
Zeus Capital believes that if the deal goes ahead it highlights how ‘undervalued’ listed UK car dealer groups currently are.
The £300m Lithia Motors offer for Jardine – which runs 50 franchised dealerships across the UK and represents brands including Ferrari and Porsche – is based on its profit before tax of £24.5m in 2021.
Zeus Capital’s Mike Allen said: ‘Jardine’s FY21 underlying profit before tax of £24.5m was much lower than £84.4m for Pendragon, £80.7m for Vertu, and £90.7m for Lookers.
‘Therefore, for the relative level of historic profitability, the reported £300m valuation for Jardine makes the UK listed dealer groups’ current market capitalisations – Pendragon £274m, Vertu £199m, Lookers £329m – look materially undervalued.’
Lithia Motors is a $13.1bn US-listed turnover company that has pledged to quadruple in size – mostly through $20bn worth of acquisitions.
It previously put in a bid for Pendragon in the summer of last year, but that deal was blocked by shareholder, and later suitor, Hedin Group.
Lithia’s move follows those previously made by US giant Penske Automotive that has made a huge success of its purchase of Sytner, the UK’s second most profitable car dealer group according to our Top 100.
Fellow American firm Group 1 also has an extensive portfolio of car dealerships in the UK. Both of these dealer groups are expected to reveal bumper profits for 2022 this week in earnings updates.
David Kendrick, partner at UHY Hacker Young, told Car Dealer that he thinks the UK market is ripe for investment.
He said there were a lot of deals bubbling away and plenty of firms ‘have a lot of cash and want to spend that money’.
He added: ‘Lithia buying Jardine would give them a substantial UK base to build from, and there are likely to be other US groups circling the UK borders awaiting the correct opportunity.
‘Frankly it’s what the market needs to stimulate some new activity and entrants, as only so much consolidation can go on with the existing players.
‘Multiples remain attractive to overseas buyers as well as substantial exchange rate benefits – I have no doubt we will see a lot more of this during 2023.’
In a briefing note, Zeus compares Jardine’s recent financial results to the listed car dealer groups and points at this as a reason as to why it feels they are so undervalued.
Mike Allen said: ‘According to latest accounts filed at Companies House for the year to December 31, 2021, Jardine earned revenue of £1.6bn and underlying profit before tax of £24.5m – adjusting for £4.4m exceptional profit on asset disposals.
‘At the FY21 year end, it had freehold and long-leasehold property assets of £103m and net debt (cash less bank loans) of £79.5m.’
Allen added: ‘In our view, the reported £300m takeover makes the UK listed dealers appear good value at current levels. This deal could spark further international entrants and sector consolidation.’
Other overseas investors have already been circling the listed dealer groups, described to Car Dealer this week by one motor trade expert as ‘sitting ducks’.
Swedish firm Hedin Group made a bid for Pendragon at the end of last year, but pulled out after due diligence blaming ‘market conditions’.
Car Dealer exclusively reported earlier this month that Pendragon was battling a £260m claim in its Pinewood division, which could be heard in the High Court. Commentators said this could have been the reason why Hedin withdrew its 29p per share offer for Pendragon.
The consensus is once this court case is settled, Hedin could be back at the table with a revised bid.
Many in the industry believe it is only a matter of time before further bids are made for dealer groups in the UK.
Mike Jones, automotive consultant, said: ‘UK motor retailers have long been attractive to overseas investors, particularly from the USA and the Middle East.
‘UK businesses are, in the main, very well run in a stable regulatory environment making them a “safe” investment as businesses look to expand internationally.
‘The cheap price of the listed motor retailers, plus the record profitability enjoyed over recent years serves to only exacerbate this attractiveness for potential investors.’
Jones helped compile the latest Car Dealer Top 100 which revealed dealers made a combined profit of £2.6bn in 2021 – up £950m on 2020.
One veteran car dealer boss added: ‘If I was running one of the big dealer groups now I’d be constantly looking over my shoulder. They’re well run, generating impressive profits and seriously undervalued by investors on the Stock Market.
‘With the strong money rumoured to have been offered for Jardine, I’d be very surprised if this is the last overseas investment we see this year.’
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