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Bidding battle gathers pace

Lookers upped the pace in the Pendragon bid battle last week (April 12) by warning shareholders that the group could lose revenues of £326m if acquired by Pendragon.

The bidding company immediately countered that the probability of any manufacturers terminating franchises after takeover was “low risk”.

But Lookers insisted that three manufacturers had gone so far as to warn in writing that they would discontinue deals “in whole or in part”. Trade sources name the three as Volkswagen, its subsidiary Bentley, and Vauxhall.

The three generated around £224m last year and account for 18.2% of Lookers’ business. The outcome could be worse than that because “franchises generating £326m… representing 26.5% of Lookers revenues are considered to be at risk”, the Lookers statement to the London Stock Exchange warned.

Carmakers can refuse transfer of franchises to bidders only if the new owner is not already an approved dealer. Pendragon chief executive Trevor Finn said in his rebuttal statement to the Stock Exchange: “We have the unrestricted right (under European Union law changed in 2003) to buy franchises if we already have a franchise of that brand.”

Brands within Lookers where Pendragon does not have representation are Toyota, Lexus, Mazda, Chrysler, VW, Seat and Bentley. Pendragon makes the point that when it acquired Reg Vardy it persuaded Renault to stay on board even though there was no previous relationship. But Pendragon does not have a relationship with VW Group; both VW and Audi franchises acquired in purchases, including Reg Vardy and CD Bramall, have lapsed.

Vauxhall is a different situation. Pendragon is Vauxhall’s biggest retail partner with 42 sites, while Lookers has 17 dealerships. The issue here is understood to revolve around the fact that Lookers’ metropolitan businesses are joint ventures with Vauxhall rather than franchises and that there may be some property reversion rights that allow the carmaker to take action independent of Block Exemption Regulations (BER).

This is confirmed by John Whiteman, director of International Car Distribution Programme and an expert on Block Exemption. He says standard leaseback and sponsored retailer relationships fall under the BER terms, but adds: “If it’s a joint venture and one where the manufacturer controls it – down to the fine print – it is no longer vertical restraint. The manufacturer can take it out of Block Exemption.”

One of the biggest brand consolidations of a combined Pendragon/Lookers group would be Jaguar and Land Rover. If the merger happens, 37% of Jaguar and just under 30% of Land Rover dealerships will be held by Pendragon.

Mike Wright, director of retail strategy for Jaguar and Land Rover, says: “If a buyer already has the franchise he is in the club. The rules of Block Exemption means that there is not much we can do about it, whether we like it or not.”

Lookers told shareholders: “The board has stated its concern about the high level of commercial risk for Pendragon in relation to manufacturer relationships that could lead to loss of value for Lookers’ shareholders if they were to exchange their shares in Lookers for shares in Pendragon.”

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