Local weather hots-up for automotive retail M&A, with abroad traders in pole place


Warnings of the longest recession on document may sign additional market disruption that may turbocharge the motor retail sector’s mergers and acquisitions (M&A) outlook.

And, whereas negotiations between UK-based seller teams are hampered by a disparity between sellers’ lofty valuations and what consumers are prepared to pay after two document years of buying and selling, together with uncertainty about future profitability, abroad traders have discovered themselves in pole place to speculate.

The worth of the pound towards the US greenback slumped from $1.37 in January to $1.07 within the wake of former Chancellor Kwasi Kwarteng’s ill-fated mini price range and solely recovered to $1.13 on the time of AM going to press after the appointment of recent Chancellor Jeremy Hunt after which Rishi Sunak as Prime Minister.

OVERSEAS ADVANTAGE

MHA MacIntyre Hudson’s head of automotive and mobility Steve Freeman stated: “Worldwide teams have the clear benefit proper now as their cash will merely go a lot additional than it did earlier than.

“That offers them the liberty to pay a bit over the percentages for dealerships they see as having the precise manufacturers in the precise places.”

Globally, 2021 was a document yr for M&A exercise throughout all markets, with acquisitions totalling $5.7 trillion (£5tln).

Information compiled by Dealogic reveals that, whereas 2022 regarded on observe to be the second busiest in additional than a decade, a slowdown in exercise in Q3 pegged its efficiency again.

In what UHY Hacker Younger’s head of automotive David Kendrick described because the enterprise’s “busiest interval for a decade” from an M&Some extent-of-view, the UK retail sector has already had a rise in abroad funding after alternate charges shifted of their favour throughout H2.

Group 1 Automotive acquired Fairfield BMW in September and Brayleys Automobiles main shareholder, Dubai-based AW Rostamani Group, has simply purchased 9 West Method Nissan dealerships*.

Foreign money fluctuations alone could have saved Hedin Group thousands and thousands on its potential takeover of Pendragon because it tabled its preliminary 29p per share bid again in September final yr.

Alistair Cassels, head of automotive advisory at MHA, informed AM the supply was “beginning to look notably good worth” after writing a report on the topic during which he said: “The supply amounted to circa £400m, which might have been round $580m lower than a yr in the past. At present that conversion stands at circa $460m or a 20% low cost.”

Cassels added: “Over the previous 5 years we’ve seen a lot of abroad entrants, together with Motus, Tremendous Group and Group 1, and we all know there may be nonetheless loads of urge for food from these abroad companies to accumulate extra.

“As for different newcomers, like Hedin, some may need grown as a lot as they will of their residence territory and be searching for a brand new alternative. Others may very well be seeking to benefit from what’s – in some methods – fairly a beneficial local weather for M&A exercise.”

Giant-scale acquisitions, akin to Marshall’s transfer for £700 million turnover Motorline in October final yr, have been absent from 2022 offers up to now.

But Kendrick stated there stays enterprise to be achieved.

VALUATION CHALLENGES

“We’ve had a busier yr this yr than we’ve had for the earlier 10 and there are nonetheless a lot of ongoing discussions,” he stated.

“That stated, I’ve by no means identified a lot change and problem out there at one time.

“That has made negotiations very troublesome in some circumstances. Now we have seen eight-figure variations in goodwill gives. That’s not simply 5%-to-6%.

“That quantum makes me assume that there’s a big disparity in approaches to the mergers and acquisitions market.”

Cassels stated it was onerous to see the place the subsequent AM100 “tremendous offers” would come*.

He stated: “There have been smaller acquisitions and consolidation the place teams have seen alternatives, nevertheless it’s onerous to think about who will make investments huge with all of the uncertainty out there proper now.

“Marshall was the large consolidator for a lot of years, nevertheless it seems to be like that may have drawn to an in depth with the top of the Daksh Gupta period.”

Former chief govt Gupta left the group in Could.

Vertu Motors not too long ago described itself as “one of many few consolidators within the UK automotive retail market with obtainable firepower” in its current H1 buying and selling replace.

Vertu Motors chief executive Robert ForresterChief govt Robert Forrester informed AM the automotive retail large may develop “wherever at any time”.

Nevertheless, the enterprise additionally revealed that it was disregarding 18 months of buying and selling efficiency from the sector’s post-COVID bounce again interval in its discussions with potential targets.

Forrester stated companies seeking to promote “have a alternative”, including: “Now we have to make it possible for the money that’s spent in an acquisition will give us an applicable return. The quantity of goodwill is central to that.

“In my view income have been going to be down by round 50% this yr, and I nonetheless don’t assume that I’m far out with that. So, we’ve to accumulate with that in thoughts.”

Simply earlier than AM went to press Vertu revealed it was in superior discussions to purchase fellow AM100 seller group Helston Garages, whose revenues totalled £627m final yr.

Swansway Group director Peter Smyth shared Forrester’s views on values. He informed AM: “Sellers popping out of essentially the most profitable two years’ buying and selling of their historical past are demanding prime greenback for his or her enterprise and it’s unrealistic. Now we have checked out a lot of companies and what we’re ready to supply and what they’re prepared to just accept stays a way aside.”

Cassels thought the excessive dealership valuations of earlier this yr have been beginning to scale back. “We’ve had the high-water mark of as much as 7x EBITDA and that’s beginning to come down,” he stated.

AGENCY UNCERTAINTY

An element complicating the duty for these valuing dealerships is the rising disparity within the attraction of sure producer franchises.

Uncertainty in regards to the potential revenue and loss profile of networks changing franchise contracts with company agreements, and the continued efforts of sure manufacturers to restructure their community’s scale or geographic unfold, means some traders won’t commit.

“There’s an terrible lot of change inside Stellantis and loads of uncertainty about what its operations will seem like going ahead, so we’ve seen little or no M&A exercise involving these dealerships,” Kendrick stated.

David Kendrick, UHY“It’s so onerous to know what the P&L outlook is. For an acquisitive enterprise that it makes life very troublesome. Volkswagen Group can be seeking to regionalise a few of its dealerships. There are such a lot of query marks.”

He added: “I’ve heard some commentators say that there has by no means been a greater time to promote, however I’m not so positive. I feel it’s very onerous to say ‘sure, that is the time to place your small business in the marketplace’, as a result of it’s so onerous to see what the long run profitability seems to be like.”

Each Kendrick and Cassels agreed which franchises offered essentially the most attraction to potential traders.

The Korean duo of Kia and Hyundai have been each very beneficial. Others not taking the company route, together with Nissan and Suzuki, additionally maintain attraction regardless of the previous’s community rationalisation plans.

Cassels argued that he noticed scope for an extra 30% discount within the variety of automotive dealerships within the UK, after two years of 1.6 million new automotive registrations.

Kendrick felt there additionally remained query marks over which established automotive manufacturers would survive in a market going through an inflow of recent carmakers, together with a rising quantity from the Far East.

What is definite is that macroeconomic elements affecting client confidence and foreign money values within the yr forward will form the make-up of, and possession of, UK seller teams within the years to come back.

The Financial institution of England raised rates of interest by a document 0.75% to three% this month and warned that the present recession may very well be the longest on document – extending into mid-2024.

Cassels stated: “Our final recession in 2009/10 resulted in loads of M&A exercise and I feel we’ll see that once more.

There’s prone to be an escalation of the ‘develop or go’ angle throughout the sector and I’d virtually definitely anticipate to see an escalation in offers.”

*This function appeared within the November version of AM, pre-dating Yeomans’ acquisition of 11 VW Group dealerships from Helston Garages, Hedin Group’s acquisition of 4 Mercedes-Benz dealerships from Mercedes-Benz Retail Group and Arnold Clarks failed try to accumulate Cars2.


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