After a spate of activity there are currently just four automotive retail PLCs left in the UK, and only one listed AM100 supergroup - Vertu Motors.
Recent market movements as seen Lookers delisted from the London Stock Exchange after the Global Auto Holdings acquisition. Pendragon looks set to follow, at least in its motor retailer guise, as the £397 million Lithia deal goes through.
Cambria Automobiles, Marshall and HR Owen had already been delisted by their owners - the latter two post-acquisition.
That leaves the aforementioned 235-site Vertu, plus Inchcape’s UK retail division as part of the huge, global automotive distribution group, then Caffyns and 20-site used car supermarket Motorpoint.
While Caffyns is a PLC, its share structure is majority owned by the family so an acquisition is unlikely unless the family wants to cash out.
Inchcape has already disposed of many of its UK dealerships over the last few years as it has continued to focus more heavily on its core global automotive distribution business. It now has under 100 sites across the UK.
So with only one true supergroup left, that really does position UK auto retail PLC as an endangered species and puts a lot of attention and focus on Vertu.
Steve Young, ICDP managing director, told AM the UK was always a bit of an anomaly in that there had previously been so many listed dealer groups.
This includes Lookers, Marshall, Pendragon, Cambria, all of which are now delisted, or are potentially soon to be gone.
What’s driven the current market landscape?
UK automotive retail has been undervalued for some time, with investors spooked by uncertainty around the agency model, the future of electric vehicles (EV), falling retail demand, recovery from the Covid-19 pandemic, the semiconductor shortage…the list goes on.
David Kendrick, UHY Hacker Young Manchester chief executive, agreed that the perception of motor retail in the City – for whatever reason, has never been valued in line with trade transactions and has always been an undervalued stock.
Kendrick (right) said: “The fact these UK dealer groups are also heavily asset backed businesses in the main and underpinned by significant property portfolios also makes it even more surprising, however that’s the stock exchange for you.”
An industry insider who preferred not to be named told AM that investors have viewed the industry as complex, low margin and cyclical.
This is combined with a general lack of in depth understanding of the market with investors closely tracking the Society of Motor Manufacturers and Traders’ (SMMT) new car registration figures as the ultimate litmus test for the health of the industry.
The insider said: “Many dealer groups posted exceptional financial performances in 2021 after bouncing back from the pandemic.
“Investors are not looking at used car margins or the return on capital invested as indicators. They see an average 2% return on sales and just don’t get it.
“As a result these groups are significantly undervalued and the strength of the dollar against the pound has meant these UK businesses are far too attractive to pass up for international investors looking for global expansion. The dealer group valuations have been too low for too long.”
Bruce Beaton, a UK motor trade investor and former UK automotive retail director, said the current position of only Vertu left as a PLC supergroup was “inevitable”.
He said the negative headlines in the mainstream press around EVs and charging infrastructure has been affecting how investors view the market.
Alastair Cassels, partner and head of automotive advisory at MHA, said the recovery from Covid-19 saw unprecedented levels of profitability from automotive dealer groups globally.
That has meant an increase in cash reserves which has given acquisitive companies the opportunity to deploy cash to expand.
Cassels said: “If you are a listed entity, having a pile of cash in the balance sheet can either go to growth or shareholder dividend.
“The former is the more attractive use of the windfall profits.”
Larger global dealer groups have also reached a ceiling in their home markets. Supergroup in South Africa, Van Mossel in the Netherlands, Lithia and AutoNation in the US and Hedin in Sweden.
Cassels explained that this can be viewed as them reaching a notional size cap either in terms of original equipment manufacturer (OEK) exposure or potentially in a competition regulation sense.
He said: “I think the former is more of the issue and is typically characterised by a dealer group having more than 10% share of a manufacturer's sales in the country of operation.
“The OEMS like balanced networks and are concerned by over consolidation.”
Weakness of the pound and the multiple
Cassels said the weakness in the pound has also influenced the wave of global investment.
While the pound has recovered from the “Trussenomic” dip the currency has remained relatively weak and therefore makes UK assets look good value.
Cassels said: “The currency is one aspect but the UK auto PLCs have been modestly valued for some time and even with the boost to earnings during 2021/2022 we didn't really see much appreciation in share price meaning that the price to earnings ratio looked attractive to investors.”
The second aspect to value relates to the transaction multiple that would be paid in a deal or the goodwill premium.
The multiple is in relation to earnings, normally EBITDA (earnings before interest, tax, depreciation and amortisation). It's a common way for bids to be constructed as it addresses the underlying profitability of a business.
Cassels (pictured) explained there is a material difference between the multiple paid in the US market and the UK market.
He said: “Typically, in the UK we see earnings before interest and taxes (EBIT) multiples of between 5-7x, but in the US the multiples tend to be more than 10x for good businesses.
“This is partly due to scale, geographical coverage and stricter franchise protections but it represents a value proposition for the UK.”
What does it mean for Vertu?
The jostling for position from US investors Lithia and AutoNation, as well as Swedish-based Hedin Group, left only one winner for Pendragon.
That leaves an unsatiated appetite for an acquisition, that could put a target on Vertu.
Kendrick is expecting at least an approach for Vertu, even if it doesn’t come off.
He said: “Quite possibly it would be a hostile takeover and ultimately everything is for sale at the right price.”
While all PLCs are technically up for sale, that doesn’t mean Vertu being snapped up is a full gone conclusion.
A hostile takeover would require an offer that would value the business attractively enough that it would persuade the group’s shareholders. It would also have to come with an explanation as to why this hostile takeover would provide a better prospect for shareholders than Vertu’s current performance and trajectory.
The insider told AM: “Vertu is in this for the long term and you can see that. It’s well run and I think you would be daft to buy Vertu and not keep Robert Forrester in place as CEO.
“You never know though, we could be in a situation where Lithia buys Pendragon and wants to look at a merger with Vertu.”
Beaton likewise agreed that Vertu represents a well run business with a company that is being built for scale.
He does have concerns though that if any outside investors do miss out, they may feel as though they have already raised capital for an acquisition and start a hostile bidding war from across the pond.
Beaton said: “I would personally prefer it if that didn’t happen. I think you need to make yourself bigger, or you risk being swallowed at the moment.
“Having said that, if I woke up tomorrow morning to an announcement that a hostile bid had been tabled for Vertu, it wouldn’t really surprise me. Nobody can predict what is going to happen.
“I always thought Marshall and Vertu would have been an interesting combination with a North and South division, but that’s not going to happen now.”
Young (pictured) said Vertu’s shareholder structure is more fragmented, so any takeover would need to convince a wider majority and this could be seen as a more difficult prospect than with Lookers or Pendragon.
Both of these businesses had large shareholders that held more power to influence the direction of a bid.
The influence of the original equipment manufacturers (OEMs) should also not be discounted. If they’re happy with Vertu, they would not be interested in approving the business changing hands.
The insider said: “These acquisitions are always a three way dance between the buyer, the seller and the OEM.
“Nothing is happening without the OEMs saying so, even if that’s just behind closed doors.
“You have to square these deals with the OEM or you risk the franchises that came with your acquisition being withdrawn.
“We’ve already seen this happen with Kia, Toyota and Lexus after the Marshall acquisition by Constellation last year.”
Young agreed that if an OEM decides to withdraw franchises following an acquisition, the buyer would suddenly be left with an extremely bespoke property portfolio.
He joked: “The bespoke Italian marble in an Aston Martin Mayfair showroom would certainly make for an extremely exclusive pizza parlour.”
Young said Vertu’s best defence for being acquired (if the current board would prefer it not to be) is to make the business as good as it can be.
He said: “From a Vertu shareholder perspective it’s a win win. I think you carry on as is. The business continues to make good acquisitions and if they put in strong performances I think you would hope that would be reflected from the investment community.”
That said, Young said someone like AutoNation is big enough to acquire Vertu. Likewise, he said there are other investors from Japan or the Middle East that would have the funds in place.
The industry insider said Inchcape could sell more of its retail locations and that Vertu could snap more of those businesses up, as it already had in 2020 with Inchcape’s 12 BMW and Mini locations.
They said: “It comes down to what the OEMs want. Vertu’s acquisition of 22-site Helston in 2022 is now well integrated so the appetite could be there for more acquisitions in the future.”
Young is confident that AutoNation will be in the UK one way or another before the end of 2024.
He said: “US dealer groups are looking for global expansion. They have reached a limit to their representation in the US so that means expansion in other mature markets.
“We’ve seen Group 1 try in Brazil and that didn’t work. China isn’t possible and the EU is more difficult because it’s more fragmented with smaller groups so it’s difficult to build scale unless you can get multiple acquisitions over the line.
“The UK is a mature market and in my opinion there are things the US retailers can learn too. You can come to the UK and have scale delivered with one acquisition.”
The big groups will only keep getting bigger too. Kendrick said that while there has already been a lot of consolidation, there is still more to come.
Kendrick added: “There are plenty of solid privately owned businesses remaining in the UK still and this won't change anytime soon.
“I'm sure there is lots more activity to come over the next decade with smaller businesses being swallowed up by the medium and larger groups.”