The UK’s largest dealer group, with 384 outlets, took the decision after the Office of Fair Trading turned its spotlight onto the takeover of Reg Vardy in February.
The OFT began talks with chief executive Trevor Finn and his team about Pendragon’s apparent dominance in certain regions with certain franchises.
The OFT previously said it was not concerned by regional dominance and would not intervene unless a dealer group built a substantial national market share that might impede competition.
Even with the integration of the Reg Vardy’s business, Pendragon has only a 6% share of the UK’s new car market.
This is the second U-turn by the OFT this year in its guidance to franchised dealers. Only a month ago, the OFT back-tracked on its advice about claiming bonuses for pre-registered cars.
The OFT says its talks with Pendragon relate to potential “substantial lessening” of competition in servicing cars still under warranty in four regions, because 86% of consumers with cars under three years old still go to a franchised dealership, even though they are aware new car warranties no longer require this.
It follows a consultation period earlier this year when the OFT invited comments on the merger.
#AM_ART_SPLIT# This left the issue open to criticism from disgruntled dealers and manufacturers, concerned by Pendragon’s scale.
The Pendragon dealerships affected are Vauxhall in Castleford, Leeds and Wakefield, Vauxhall in Airdrie, East Kilbride and Motherwell, Vauxhall in Hartlepool and Land Rover in Northamptonshire.
Pendragon has been asked to sell the businesses, and says it will work closely with the OFT to reach agreement on appropriate undertakings that will address its concerns. However, the OFT says it will consider further whether the proposed divestments are enough.
Competition specialist Neil Baylis of City law firm Kirkpatrick & Lockhart Nicholson Graham LLP, says it is interesting that the OFT has focused on servicing rather than sales.
He adds: “It suggests that the OFT believes people will travel further to buy a new car, or will buy from internet or other sources, but when it comes to servicing they will tend to go to their local franchised dealer.”
Baylis believes servicing will become the focus of the OFT’s analysis of future dealer group mergers until consumers start voting with their feet and take their cars to independent workshops.
“The OFT has gone to great lengths to require manufacturers to allow customers to have their cars serviced elsewhere without invalidating the warranty, but in practice the majority of people still prefer to go to a franchised dealer rather than their local independent.
“The competition law assessment has to be made on what consumers are actually purchasing rather than what they could purchase if they chose to. The existence of a choice is not a sufficient defence,” he says.
Mergers can be investigated where either the turnover of the target exceeds £70m, or the merger creates or exceeds a 25% market share. If the OFT fears a substantial lessening of competition, it can either refer the merger to the Competition Commission or require the buyer to give undertakings in lieu of a referral.
#AM_ART_SPLIT# Vardy boost to financials
News of the OFT’s intervention broke shortly before Pendragon plc announced its financial results for the first six months of 2006 on Monday, August 7.
Its report to the London Stock Exchange shows the Vardy takeover has provided a substantial boost to its profitability. Underlying operating profit has jumped by almost £17m to £73.3m, against the £56.7m generated in the same period last year.
However, on factoring the new businesses out, Pendragon reports that on a like-for-like basis its profit fell by £3.7m. Operating margins at its existing dealerships dipped to 2.4% from 3.1%, and new car margins weakened although aftersales margins were maintained.
Half-yearly turnover increased to £2.64bn from £1.75bn. The bulk of that £895m increase comes from acquisitions.