Dixon Motors is due to ask its shareholders tomorrow for permission to sell 17 of its best retail sites for £34m. The deal is necessary because in the last set of accounts Dixon's debt was shown at more than 100% of assets.
There has been no real alarm up to now because the debt has been run up in the name of acquisitions. But that growth has slowed for a while and the company is resolved to get the gearing down.
Sale and leaseback of retail premises in this sector has long been controversial because deals have rebounded on the companies. Both Appleyard and DC Cook were severely wounded by terms which seemed reasonable at the time but turned out to be crippling. The Sytner group was the most recent to strike a deal.
In the Dixon deal, rents are fixed for 30 years starting at a yield of 7.7%. Every five years, the rents will rise by 3% per annum.
Dixon finance director Chris Elton said: “We will be paying £7.70 a sq ft on average. That is a lot lower than some competitors and a recent revaluation we had in Doncaster was £9. We can't believe inflation can be much less than 3% a year.
“The greatest value is that it brings predictability into the business. We have done some interest rate swaps as well to make the cost of money more stable.”
Mr Elton claimed the deal – struck with an anonymous businessman who insisted on confidentiality – was not constructed to maximise the up-front cash sum. “We preferred a low annual rate of increase to the maximum price,” he said. By selling the properties for more than they are valued at in the books, Dixon will also book a technical profit of £2.6m. Group gearing after the deal will be around 65%.
There is a good chance the buyer will split up the 17 properties into packages and attempt to sell them on at a profit.
The biggest criticism of sale and lease back is that you lose control of the business and have huge liabilities for rents if there is a need to change the shape of the business and there are no buyers for the lease.
Rob Toms, a director of London venture capitalist Smedvig Capital, said: “You have to be clever to know what property requirements you will have in a motor retail business in 30 years time. You lose so much flexibility by having to sell a lease. The chances are people will not buy it for the same reasons that you want to sell it.”
Also, Dixons will lose the chance to make property profits or a one-off gain if the site gets planning permission for food retail.
Mr Elton has few qualms. “These are some of our best properties,” he said. “We think it highly unlikely anybody would ever want to get rid of them or change the way that they operated.”
The group still has much to do to convince shareholders the strategy is a strong one. The shares at 175p are up from the worst point of under £1 but still well below the best of £3.
Dixons is committed to being a regional player in Yorkshire, Lancashire, Lincolnshire and the North Midlands and also committed to volume franchises.
“No mega-deals are in prospect at the moment,” said Mr Elton. “But we continue to believe that bigger is better in motor retail.”
The new financial headroom will be used to build new sites. Six out of 70 were rebuilt last year, and next year could see a similar number of completions.