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'Contracts should be five or more years'

European dealer trade organisations should press for rolling agreements with carmakers lasting “at least five years”, said Pendragon chief executive Trevor Finn. “That would provide more certainty for retailers and encourage them to invest,” he said. He shares this view with RMI franchised dealer director Alan Pulham (see the AM-online 'In Depth' interview.

Mr Finn will reveal his forecast of the likely shape of car retailing, following next year's Block Exemption review, at Automotive Management's autumn conference on October 4.

“There will be a renewal of Block Exemption in some form,” said Mr Finn. “At the moment trade organisations are casting their votes – it's rather like the Eurovision Song Contest.”

Piers Trenear-Thomas, of Grant Thornton Motor Retail, will offer an analyst's view of Block Exemption. He said: “Block Exemption could turn out to be a non-event, but there is enough of a trend with the AA and supermarkets getting involved with the aftermarket to suggest that changes will be made to the link between selective distribution and aftersales services.”

Why 'clever Trevor' smiled on group deliverance day

Sixteen months ago Pendragon was more of a pilot light than a marauding fire-breather. Its share price had shrivelled to 98p – a quarter of its lifetime high. Chief executive Trevor Finn was on the back foot in meetings with shareholders, and not happy.

Interim results day was the moment of deliverance. Mr Finn had made promises on future performance for most of last year, and the disclosure of the financial results for the first half of 2001 was always going to be a big moment.

“Everybody has been waiting for this as a validation of what we have been doing and saying,” Mr Finn said, after facing stock analysts and shareholders on the day of Pendragon's first-half results. “I think they have got pretty much what they were expecting.”

There had been increasing support. The share price crept up to 268p as the months passed. And as the results announcement hit dealing screens, the price flicked up another 5%.

Mr Finn had a second, less obvious cause to smile. He had bought 100,000 Pendragon shares for himself right at the bottom (98p) and on the post-announcement share price he was a quarter of the way to his next million. That purchase was on top of the 800,000 options awarded to him last year at 98.5p – now showing a profit of £1.3m.

For the investors, Pendragon has moved from basket case to cash dispenser. The dividend at the half-year was increased by 8% – a considerable expression of confidence. If that rate of increase is maintained at the full year, the shares are yielding 7.5%. Try earning that with the Pru (which just happens to be Pendragon's third largest investor).

Clever Trevor bought an income stream of nearly 20% when he snatched shares at 98.5p.

The basket case reputation was a general industry thing – concern about car price reductions, imminent Block Exemption changes, falling demand (sales didn't fall much) and growing competition.

But in addition, Pendragon had problems of its own making. The loss-making relationship with Fiat was becoming a habit and spread into Ford. It also bought all the car dealerships from Lex Service which has given up on the sector. Finally there were horrid liabilities on the lease fleets with residual values tumbling.

It has turned out far better than was expected. Basic earnings were up 30% year-on-year in the first half. Fiat is gone; Ford losses are down fractionally to £600,000 in the first half. The Lex acquisitions have been sifted pretty rigorously. the lease liabilities settled with a provision and operating margins are up to 3.4%.

Pendragon has finally and irrevocably pulled out of Fiat, Saab, Toyota, Mazda, Peugeot, Nissan, VW, Audi and Suzuki. It is still negotiating with Mercedes-Benz over the loss of five dealerships offset by the rights to the Yorkshire territory.

But the smartest move of all has been to play the strength of the property portfolio which is all freehold and which Mr Finn needed to sell businesses in order to fulfil the strategy of becoming bigger with fewer manufacturers.

Happily, the properties generated £5m of surplus cash which was used to buy back (cheap) Pendragon shares in the stock market and cancel them (thus saving dividend payments).

Total debt has now fallen from a tad over 100% to 90% so that debt of £125m is less than assets of £140m. That is, at last, less than the market valuation of the company at £165m.

Those relationships should improve again soon. There are properties empty with a book value of £17m. Ask Mr Finn whether he is likely to sell them for more than book value and yet another smile tugs at the corners of his mouth. It has been a good half year. (September 7, 2001)

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