Lookers and Pendragon – two of the biggest dealer groups in the UK – have held talks about a possible merger and they may not be the last.
Lookers, which has delayed reporting last year’s accounts and posted a £4m charge for irregularities it has uncovered, has reportedly been approached by Pendragon.
Pendragon is in an equally precarious position, posting a loss of £117.4m for 2019.
Sky News is reporting that Lookers has rejected the approach and the decision not to engage with Pendragon was ‘largely a consequence of its board’s existing workload’, which includes contending with the Covid-19 crisis and an on-going FCA investigation.
Mike Jones, chairman of ASE Global, told Car Dealer Magazine that he was expecting to see consolidation in the car retailer world like this as the crisis hammers dealers.
Jones said: ‘It is very interesting that Pendragon chose to approach Lookers. All motor retailers look very cheap when you compare their market capitalisation against their net asset value.
‘I am expecting further consolidation in the next two years. The timing of this move amidst the current crisis is fascinating.’
Lookers is the second biggest dealer group in the UK with a turnover of £5.1bn and Pendragon is the third with a turnover of £4.6bn. The combination of the two would make them the biggest by a considerable margin.
Sky News reports that it believes there are no ‘live discussions’ so it is unlikely the approach will be reported to the Stock Market on Monday.
However, one Pendragon investor is reported to have said the dealer group ‘could be interested in seeking an alternative merger elsewhere’.
Mike Allen, of analysts Zeus Capital said: ‘We note with interest that one Pendragon shareholder is supposedly seeking alternative merger partners elsewhere.
‘However, to our mind there is a lot for dealers to manage at present with Covid-19 and the timing appears strange to us. No doubt though it appears the consolidation theme could well be re-ignited over the coming months.’
David Kendrick, a partner at UHY Hacker Young, told Car Dealer Magazine that he was unsure whether a merger of such size would be allowed by the Monopolies and Mergers Commission.
he said: ‘There has been a lot of speculation around what will happen with Pendragon and whether it will be broken up, similarly Lookers’ market cap in recent months has looked exceptional value.
‘While this rumoured merger discussion appears to have little depth to it, I would have thought the two groups have their own challenges to overcome as opposed to merging and dealing with all of the integration issues.
‘I’m also not sure whether the monopolies and mergers commission would allow such a player who would command £10bn of the industry turnover!’
Jones added that both businesses have suffered from share price falls in the past year as a result of ‘management instability and operational issues’.
He said: ‘I’m sure the prospect of any combination would have the manufacturers contemplating how they would react to the creation of such a massive motor group.’
Pendragon has had two chief executives since Trevor Finn retired last year. Car Dealer reported yesterday that Finn looks set to be plotting a return to the market with his own used car proposition.
Mark Herbert joined the dealer group last year, but quit after just three months. The retailer was rudderless until Bill Berman was appointed chief executive in March.
Meanwhile, Lookers has had similar difficulties.
Long serving chief executive Andy Bruce and chief operating officer Nigel McMinn left abruptly following two profit warnings last year.
Mark Raban took over as chief executive officer and Cameron Wade was appointed chief operating officer in February. But then Wade departed suddenly a few weeks later.
Kendrick added: ‘For me, these businesses have perhaps got too big and hence some of the challenges they are currently facing.
‘Many say more than 50 sites becomes difficult to control and influence culture. I think there is a lot of sense in this so perhaps breaking these larger groups up is the right answer as opposed to creating an even bigger one.’
Car Dealer Magazine has contacted both Pendragon and Lookers for comment, but so far there has been no response.
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