12:31 pm, November 30, 2020
Lookers have fears over the group’s ability to continue as a ‘going concern’ if economic conditions worsen.
The management team of the embattled car dealer laid bare their fears about the viability of the company last week in an update to the Stock Market.
Lookers said it had ‘modelled a number of adverse scenarios’ that could cause the company serious issues.
The company has war gamed a number of financial scenarios, the worst of which it believes to be ‘severe’ and ‘plausible’.
The update said the group had ‘sensitised’ its forecast for next year to ‘consider a reasonable downside scenario’ including a 20 per cent decline in aftersales and new, used and fleet sales falling by between 10-20 per cent.
It had also factored in a ‘significant regulatory fine’ from the FCA and the ‘inability to dispose of surplus properties in 2021’.
Lookers believes the FCA investigation will cost it at least £15m and has already announced it will close 12 dealerships which it will need to dispose of.
Strong wording
The group is facing on-going Covid-19 uncertainty, an unresolved Brexit deal and other ‘macro-economic’ factors causing it headaches and, it’s important to point out, for the rest of the motor trade too.
However, the wording used in the Lookers update is far stronger than that used by other listed dealer groups when preparing similar going concern assessments.
The Lookers update said: ‘Despite resilience of liquidity, the aggregate of these factors gave rise to a material uncertainty which may cast significant doubt over the company’s and group’s ability to continue as a going concern.
‘Despite resilient liquidity and before mitigating actions, ongoing uncertainties of Covid-19 and Brexit mean severe but plausible downside sensitivities indicate material uncertainty regarding going concern.’
Pendragon told shareholders in September it had modelled similar scenarios, but was far less worried, adding it was ‘confident’ it had ‘sufficient funds to continue to meet its liabilities’.
Lookers lenders – a consortium of five banks each of which lend the group £50m for a total revolving credit facility (RCF) of £250m – could be spooked.
Revised covenants until June 2021 have been agreed and take into account the impact of Covid-19. Pretty much all dealer groups have breached banking covenants during the pandemic.
The update added: ‘The group is subject to certain reporting deadlines with its lenders. Delays in achievement of those deadlines could cause a covenant breach.
‘In such circumstances and without actioning mitigating actions available, the group may be unable to realise assets and discharge liabilities in the normal course of business.’
Resilient
ASE Global chairman and compiler of the Car Dealer Top 100 Mike Jones said: ‘Every car dealer has to make a going concern assessment and in the Covid world dealers have shown how robust and resilient this industry is.
‘Many dealer groups have reported strong numbers since reopening from the lockdown and generated good cash flows. The car industry has proven it is very good at adapting.’
Bankers will be pouring over the Lookers update as they assess the ongoing financing requirements for the firm.
In 2019, the group used £186.9m of the £250m facility which is due to be renewed in March 2022.
A problem may arise from the group’s pension deficit. Lookers has agreed with the scheme’s trustees to increase payments to the pension pot to £12m a year.
This is above the £9m allowed by the banks in its RCF terms and requires approval from lenders otherwise Lookers will breach banking covenants.
The company is also burning through cash. The report reveals that the group increased its stock funding by £108m during the 2019 financial year, but still posted a loss of £45.5m for the year.
And to make matters worse, the Lookers booked non-cash impairment charges of £30.4m against poor performing BMW and Ford dealerships during the year.
The report added: ‘These adjustments are considered to be reflective of the comparative downturn in the cash generating unit’s (dealerships) value in use when compared with those that were expected when these past acquisitions were made.’
ASE’s Jones said this ‘wasn’t unusual’ and that many of the listed dealer groups had been forced to book similar impairment charges.
The report also outlines an issue with ‘technical compliance’ with the Companies Act 2006 in relation to dividends paid to shareholders for the 2013, 2014 and 2015 financial year.
Lookers said: ‘The dividends were paid to shareholders at a time when the company did not hold adequate distributable reserves by reference to its last set of annual accounts.’
The update added that there ‘were sufficient reserves held in subsidiaries of the company’ but these were not paid.
David Kendrick, partner at accountancy UHY Hacker Young, said: ‘The bad news for Lookers is all out there now and the fact remains the group still has some fantastic businesses within it.
‘I can certainly see some of the portfolio being slimmed down as they dispose of businesses and focus back on their core as well as improving controls.
‘I don’t believe someone will take the whole group as it is too large and I remain convinced that big is not always beautiful.’
Private
What happens next for Lookers remains to be seen.
In a statement, Lookers told Car Dealer: ‘We emerged from the initial lockdown in a strong position, having taken decisive action and are well equipped to deal with the second lockdown.
‘We have an industry leading portfolio with strong property asset backing, underpinned by a talented and dedicated team which means that we can look to the future with confidence.’
However, some of the experts Car Dealer spoke to, who didn’t want to go on the record, believed a break up or sale could be on the cards, while others said Lookers could be taken private by one of the group’s largest shareholder’s Tony Bramall.
Bramall bought forward the date he was leaving the board, announcing in October he would step down by the end of the year.
He has been more heavily involved operationally in the past year and, if he enjoyed it, may want to take control of the group.
One industry analyst said that although the Lookers problems looked serious, they were ‘no different’ to the assessments being made by other dealer groups.
‘The banks are likely to be supportive, but had quarter three not been so strong it might have been a different scenario,’ added the expert.
Lookers interims are due out in December when it is hoped shares will be relisted for trading.
For more Lookers stories, click here
Lookers timeline: What’s happened when?
October 31, 2020 – Long standing Lookers non executive director Tony Bramall, one of the group’s major investors, bought forward the date he would leave the board to the end of December. No reason was given for his early departure.
October 19, 2020 – Lookers updates market on performance in Q3, but still no word on its 2019 accounts or the FCA investigation. Analysts expect results to be out before December.
August 20, 2020 – Accounts delayed for the fourth time and no promise given as to when they’ll be published.
June 9, 2020 – Lookers says it will suspend shares on July 1. Delays accounts for third time and says they’ll be published ‘no later than the end of August 2020’.
June 5, 2020 – Lookers says it will axe 12 dealerships, cut 1,500 jobs.
May 2020 – Pendragon CEO Bill Berman admits he wrote to Lookers to discuss a merger and updates Stock Market to that effect. Move described as ‘two drunk men bumping into each other in a bar’.
April 2020 – Fraud investigation deepens. £4m charge revealed and firm says there could be more. Delays accounts to June.
March 12, 2020 – New chief operating officer Cameron Wade leaves role after only a month in post
March 11, 2020 – Lookers delays results saying in final stages of preparation ‘potentially fraudulent transactions’ in one division were discovered. Promises results in April.
November 2019 – Chief executive Andy Bruce and chief operating officer Nigel McMinn leave firm abruptly
June 2019 – FCA launches review into sales processes at Lookers between January 2016 and June 2019. Lookers cannot ‘estimate what effect, if any, the outcome of the investigation may have’.
December 2018 – Lookers launches independent internal audit into sales process. It eventually finds ‘control issues’ in sales process where ‘improvements’ are needed. Findings handed to FCA.
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