The car dealer acquisition vultures are circling troubled dealer group Lookers and it’s only a matter of time before they’re swallowed up.
That’s the view of leading automotive industry analyst Mike Allen, from Zeus Capital, who believes once Lookers reveals how bad its situation really is, the acquisitive groups will start to swoop.
Lookers is reeling from an FCA investigation, fraudulent activity discovered in one of its divisions, dealership closures and job cuts.
A source at Lookers has revealed that while further fraudulent activity has not been discovered by the Grant Thornton investigation, which has now finished, ‘accounting irregularities’ have been in a number of divisions.
One of those is believed to be Ford.
Lookers is the second biggest car dealer group in the UK by turnover – £5.1bn a year – and has faced a series of top management changes in recent years and has delayed last year’s results again.
This week the group warned that its shares could be suspended on July 1 and its auditors Deloitte resigned their position. It was the second unexpected announcement to the Stock Market in the space of five days.
‘Lookers need to get the bad news out of the way,’ said Allen. ‘The Stock Market generally looks through bad news, but they need to get it out and fast.
‘Perhaps when the situation is more clear that could give rise to someone making an approach once the uncertainties are out of the way.’
Allen believes the delays to the accounts surround the fraud investigation and how far back those misstated bonuses go.
‘Is it just for last year or do they need to go further back?’ questioned Allen. ‘Lookers just need to know how big the fine will be from the FCA.
‘The questions really are how big is the problem with the fraud and how far back does it go?’
It is believed that the fraud investigation centres purely around bonuses in the group’s Audi division.
This was headed up by former board member Cameron Wade before he stepped up to the top table. When the investigation came to light he immediately left the business.
Lookers said in April that the fraudulent charge will result in a one-off charge of £4m in its 2019 accounts, but the investigation was widened across the group.
The volume bonuses are paid by manufacturers for dealers hitting, for example, 130 per cent of their sales target. These can be worth huge sums of money and can be the difference between profit and loss for a division.
It is believed Lookers had inflated its sales to achieve these targets and was subsequently paid out bonuses that it shouldn’t have received.
Audi is thought to be the division where irregularities have occurred. A Lookers source said a ‘number of other divisions’ in the group also have ‘accounting irregularities’ that will need to be resolved.
Ford told Car Dealer it ‘would be inappropriate to comment’. Audi did not respond to our request for comment.
A spokesperson for Lookers said: ‘In March, the group announced a delay to the publication of its financial results for the year ended 31 December 2019 due to the identification of potentially fraudulent transactions in one of its operating divisions. During March 2020, in conjunction with Grant Thornton, the board commenced an investigation.
‘The initial phase of the investigation, now completed, focused on the operating division concerned and identified certain misrepresented debtor balances in respect of bonus receivables together with a number of fraudulent expenses claims.
‘At the request of the board the initial investigation was extended across all operating divisions and identified some operating divisions where certain non-cash balance sheet accounts had not been fully reconciled, in accordance with group policy.
‘The initial findings of the investigation have highlighted areas where financial controls require strengthening to prevent a repetition of such accounting irregularities in the future.
‘In addition, the investigation has highlighted the need for Lookers to further strengthen some behavioural and cultural aspects relating to its control environment. Robust remediation activity is in progress.’
Last week, Lookers announced it was to axe 12 more dealerships and 1,500 jobs as it aimed to reduce costs by £50m a year.
Lookers identified 15 dealerships for closure last year and has lined up a further 12 which it will either close, consolidate or refranchise.
Because of this smaller portfolio, redundancy consultations have begun which will result in around 1,500 job losses. The restructuring could deliver annual payroll savings of £50m, with the redundancy costs likely to be around £9m.
Currently Lookers employees 8,100 people and these cuts could see on average 12 staff cut from each dealership the group currently runs.
Lookers turned down advances from Pendragon CEO Bill Berman in May who approached the group about a potential merger. He said he was ‘looking around’ and that the conversations didn’t go anywhere. Pendragon was forced to reveal the approach to the Stock Market.
In November, former CEO Andy Bruce and COO Nigel McMinn left the business as the company issued another profit warning. Then, it said profits for 2019 would be £20m, compared to £67.3m the year before.
It is not yet known what impact the fraudulent charges will have on last year’s profits. Lookers hopes to release last year’s results in August. Because this delay is outside the time limits allowed, shares are likely to be suspended on July 1 until the results are revealed.
Watch our interview with Mike Allen on Car Dealer Live from May below
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