Increasing numbers of franchised car retailers are considering exit strategies as economic pressures and uncertainty around agency model retail plunge the sector into a period where uncertainty is now the norm, MHA has suggested.
And the consultancy firm suggested that macroeconomic factors causing investors to “carefully consider their future strategies” could trigger a new period of mergers and acquisitions as overseas investors start to eye opportunities in the UK retail sector with interest.
Alastair Cassels, MHA’s head of automotive advisory, said: “The changing of the UK Prime Minister has resulted in the pound slumping to 37-year low against the US dollar.
“This might be depressing news for some FOREX traders but it represents a huge opportunity for some foreign investors. We’ve seen activity that would seem to back this up with acquisitions by Group 1 Automotive, Supergroup and a failed bid for Pendragon by US based Lithia Motors.
“The buying power of a US based auto investor has never been stronger. In 2014 a pound was worth $1.7 whereas now we appear to be approaching currency parity.
“In the context of dealer acquisition this is significant. If we consider Lithia’s recent offer to the Pendragon PLC shareholders of £0.29 per share in the context of the depreciating pound it’s not difficult to see why there is an appetite for foreign investment.
“The offer amounted to circa £400m which would have been around $580m less than a year ago. Today that conversion stands at circa $460m or a 20% discount.”
Cassels added: “When you also consider that UK property is still seen as a growth asset class in the long term then it’s no wonder that there is appetite to expand into this sector.
“Other buyers from Europe, Middle East and South Africa are also established in the UK and known to be acquisitive.”
Sellers ‘overpricing’ dealerships
Acquisitive UK-based car retailers have recently told AM of their difficulty in negotiating purchase prices for new businesses which have seen industry headwinds drive their profitability to record levels in the post-COVID period.
In its recent H1 trading statement AM100 PLC Vertu Motors revealed that, despite having “significant firepower to expand its footprint of franchised dealerships across the UK”, it would be disregarding 18 months of financial results in any negotiations over new acquisitions.
Chief executive Robert Forrester told AM that businesses looking to sell “have a choice”, adding: “We have to make sure that the cash that is spent in an acquisition will give us an appropriate return. The amount of goodwill is central to that.
“In my opinion profits were going to be down this year by around 50% this year, and I still don’t think that I’m far out with that, so we have to acquire with that in mind.”
Swansway director Peter Smyth was of the same opinion. He told AM: “Dealers coming out of the most successful two years trading in their history are demanding top dollar for their business and its unrealistic.
“We have looked at a number of businesses and what we are prepared to offer and what they are willing to accept remains some way apart.”
Franchise appeal
MHA pointed out that car retailers with franchised partners experiencing growth, and not seeking to shake-up their agreements with the introduction of an agency model, might be less inclined to sell at the current time due to a comparative level of certainty about their future.
It highlighted Kia and Hyundai, which have powered ahead and YOY are 18% and 27% up, respectively, taking share when the rest of the top 10 have lost it.
MG also looks an appealing prospect, it said, after establishing itself as a major player with 3% share and almost 70% growth year-to-date ahead of the arrival of the new MG4.
For those considering car dealership disposals, Cassels suggested that now might be a good time “If you don’t fancy trading through a recession”.
He added: “There is appetite from some investors who view this VUCA world as one of opportunity to secure future shareholder value however there may be an equal amount who simply, don’t fancy the upheaval.”