3:08 pm, June 20, 2023
UK car dealer PLCs look ‘exceptional value’ and it’s highly likely more listed groups will follow Lookers into private hands.
Speaking on a special Car Dealer Live, UHY Hacker Young CEO David Kendrick – a mergers and acquisitions specialist in the motor trade market – said he thinks other deals will now quickly follow.
Canadian car dealer Alpha Auto Group, via a bidding company, made a move today for Lookers which valued the business at £465m.
Lookers has recommended the offer is accepted and says it already has approval from 42 per cent of its shareholders. These include Cinch, owned by Constellation, which has said it will sell its shares as part of the deal.
In the video, which you can watch above, Kendrick said: ‘I think [the other listed dealers] have got to be attractive, haven’t they?
‘Sometimes what you find in the transaction market is when one happens, a few happen in quick succession because it brings it to the attention of other people.’
Pendragon (16.7p) and Vertu (66.4p) shares have both risen five per cent today off the back of the Lookers news.
Kendrick said he thinks the listed car dealers represent excellent value with deals in other industries going ahead at ‘six, eight or 10’ times profit multiples.
He said he thinks the Alpha deal – if it gets the nod from shareholders – would represent phenomenal value for money for the Canadians.
Lookers’ annual results for 2022 showed an increase in revenue last year to £4.3bn with the firm making pre-tax profit of £82.7m.
Lookers reported a ‘robust balance sheet’ that had net cash of £66.5m, plus a property portfolio worth £290.5m, equivalent to a combined 92p per share. That was back in April so these figures are likely to have improved.
What has shocked most people in the industry is that Alpha Auto Group (AAG) is a relatively small player. Last year it had revenues of $1bn and EBITDA profits of $100m.
It has just 22 dealerships in the US and Canada, although the size of these compared to the UK are huge.
AAG chairman Kuldeep Billan started the business in 2014 after switching from mining. It is believed the firm made its first acquisition in 2018 and the boss is particularly attracted to agency sales.
Cliff Banks, president and founder of The Banks Report, an American publication that focuses on the automotive retail space, said: ‘Kuldeep Billan’s play acquiring Lookers is a bold move, and a surprise.
‘He’s quietly been adding stores here in the US and Canada the last five years, but global expansion? AAG wasn’t on that list until today.
‘With this deal, I believe AAG joins Penske, Group 1 and Lithia as the only US/Canadian groups with stores overseas. Billan is quickly becoming a player in the dealership space.’
AAG is still the relative minnow in the Lookers deal and they’re said to be funding the acquisition with money borrowed from Canadian banks.
One banker added: ‘It’s a sort of leveraged reverse takeover which will see Lookers management staying with the enlarged group. I think that some of the language in the announcement frames it as more of a merger too.
‘The implied goodwill multiple on top of tangible net assets seems to be around 3x profit before tax, so maybe not a brilliant price versus the likes of Marshall and Jardine.’
Too cheap
Other experts believe the offer is too cheap too. Liberum analyst Sanjay Vidyarthi said he thinks the deal ‘looks low’ and said he thinks the shares were worth 150p.
Kendrick said: ‘Even at a target price of 150p per share you would still be looking at a valuation that was at a quite a substantial discount to net assets.’
So could that mean a rival offer could now be tabled? Well, some industry commentators certainly think so.
One merger and acquisitions expert told Car Dealer it thought the American owner of Sytner, Penske Automotive, could now line up with an offer.
However, more likely would be a rival bid from Lithia Motors.
Lithia swooped in March on Jardine, which it bought for £300m. Jardine has 50 showrooms and represents the likes of Aston Martin, Ferrari, Maserati, McLaren and Porsche in the UK.
Lithia had previously tried to buy Pendragon last summer but was blocked by the Hedin Group. Hedin eventually made its own offer but pulled out in December.
The rumour then was the deal didn’t go ahead thanks to a huge court case hanging over Pendragon’s head. It’s not yet known if that has been settled, or is still heading to court, but it’s likely once that’s dealt with another offer will arrive pretty sharpish.
Lithia Motors is floated on the New York Stock Exchange and is valued at more than $6bn. It is the US’s second largest automotive retailer, boasting more than 250 locations and has said publicly it wants to rapidly expand via acquisitions.
At the time of the Lithia-Jardine deal, Zeus Capital analyst Mike Allen said he thought it ‘highlights how undervalued the UK listed franchised dealer groups are’.
It was Constellation Automotive Group that was the first to spark off the mega deals last year when it acquired Marshall Motor Group for £325m. Back then, that deal took even the Marshall board by surprise.
But it’s Vertu Motors that’s now a ‘sitting duck’, according to one senior automotive car dealer boss.
It recently made its biggest acquisition to date with the £182m deal to acquire the lion’s share of Helston Garages. It saw 28 new dealerships added to Vertu’s impressive portfolio including Volvo and Ferrari.
While Vertu is concentrating on integrating those businesses into its wider group, others around the world will be sizing it up.
However, the biggest issue with a Vertu deal would be the fact the shares are finely split between lots of investors, making it hard for a bidder to get the agreement it needs to push others over the line.
One analyst said: ‘I reckon that it would be fairly easy to get to north of 100p/share for Vertu by applying a similar acquisition multiple.
‘What Vertu doesn’t have, though, is a large or dominant shareholder to push through any potential deal in future, so I’d hope that someone wanting to buy it would really need to pay up to get the necessary shareholder support.’
Another target could be the used car dealer Motorpoint. Last week it unveiled a woeful set of annual results and its share price – and consequently its market cap – have plummeted. One expert privately told Car Dealer they think it’s ‘ripe for the taking’ as a result.
Where the next bid comes from, and for whom, remains to be seen. However, it seems ever more likely that Cambria boss Mark Lavery’s predictions at this year’s Car Dealer Live – that there’ll be ‘no listed car dealer groups by the end of this year’ – could now very well come true.
