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Stock market: Terminating franchises

In its defence against the Pendragon bid, Lookers last week (Wednesday, April 12) decided to make an issue of carmakers’ rights to terminate franchises if there is a change of control. But its language was interesting: Lookers said carmakers have the right “under the existing franchise or other agreements” to terminate on change of control.

Much speculation arose as to what the “other agreements” might be when the Block Exemption rules specifically deter any of the parties from introducing measures that obstruct passing of a franchise to an acquiring group that already has the franchise.

Speculation focused around the idea that Lookers’ Vauxhall business is a joint venture rather than a franchise and that there may be contract rights that allow Vauxhall to terminate Pendragon.

Pendragon asks in an open question: “Pendragon asks how the interests of Lookers shareholders have been best served by entering into ‘other agreements’. Such changes of control provisions are neither necessary nor desirable.”

Indeed. If dealer groups do sign franchise agreements that circumvent the intention of the European regulations, that detail should be a matter for Stock Exchange disclosure because they directly affect the valuation of the business. If an appropriately qualified bidder cannot carry off the franchises in an acquired company, the bid target is worth that much less to its shareholders.

Such a practice would amount to a poison pill.

Two questions will be asked of Vauxhall. Does it want to terminate Pendragon, its biggest dealer? If it does, is it not concerned that the European Commission would regard that as breaking the spirit and intention of the franchising rules?

Lookers needs to clarify whether it is saying the business is at risk because Vauxhall is technically able to terminate, or whether Vauxhall has notified that it wants to.

Lookers had a good thing going when it objected to the Pendragon bid on the basis that its financial results were so good that the Pendragon offer vastly undervalued it. But the market does not generally like rinky-dink ideas that distort a fair argument.

The recent share price movements of both companies suggest that the debate is closely drawn, and the independent analysts working in the sector are pretty equally divided on the balance of the arguments. The full Lookers defence document should express the differences between “technically able” to terminate and “able and wanting” to terminate.

Then shareholders can decide whether business in genuinely at risk.

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