[ad_1]
As expected, the deal was finalized last week for the acquisition of UK-based dealer group Jardine Motors by US-based Lithia.
It is anticipated that the coming months will see more activity by Lithia as they look to expand their footprint in the UK from the premium focus over which Jardine currently has.
Although not published, it appears that Jardine’s own transaction value was around US$500 million so with a few additional deals, the total investment could easily be closer to a billion dollars.
That’s a lot of money by any standards, but based on Lithia’s comments, it was financed from “existing balance sheet capacity”, ie cash and existing loan facilities.
A balanced approach to funding deals appears to be common among established dealer groups pursuing growth strategies.
When Robert Forrester, CEO of the UK acquisition Vertu dealer group (ranked by us as #11 in Europe’s Top 50 last year), announced their final half-year results a few months ago, he called the group “significant firepower for growing franchised dealer footprint across the UK.”
This was demonstrated months later when they announced the acquisition of the Helston Garage regional group of 28 outlets for a total consideration of £117 million, financed through a combination of renegotiations and a new debt facility.
Investors seem to agree as the share price has been growing steadily since last October, up more than 10% since the deal was announced.
It is interesting, then, to contrast this with the approach adopted by so-called disruptors, who appear to rely heavily on other people’s money to fund their ambitions.
I’ve commented before about the continuing ups and downs of Cazoo since I last wrote about them two months ago.
Since then, their share price has more than halved, reducing the value of the business by $91 million to its current share capitalization of only $73 million.
I’m wondering if two weeks ago Jonathan Dunkley’s (formerly CEO of CarShop, and later a member of the board of Sytner, UK branch of Penske, after their acquisition of CarShop) rise from Strategic Advisor to Chief Operating Officer might be management’s first buying step?
Putting that question aside, it’s clear that most of the funds that have been spent on marketing blitzes and acquisitions that are then sold for pennies in the pound have not come from founders, bank lenders, or trading profits, but from external investors.
Looking then at the Constellation Automotive Group, amazingly at auto retail it’s owned by a private equity firm, TDR Capital. Constellation had created a cinch business as a startup in the used car sector in direct competition with Cazoo as well as traditional players, but also acquired the CarNext business from LeasePlan (another portfolio company from TDR), Marshall Motor Group (#15 Europe at the time). ) in a deal that was finally finalized last spring and a 20% stake in Lookers (Europe #5).
Results for the 2021/22 financial year announced back in January showed that cinch lost £149 million pre-tax over the period, while the Constellation Group as a whole made a pre-tax profit of just £34 million.
This is standard operating procedure in my experience for any private equity firm asking their portfolio business to fund any transactions on their balance sheet as well as the associated deal costs. So, if the funds for spending and launching this cinch don’t come from shareholders or retained earnings, where will it come from?
It is reported that Constellation raised £1 billion in private capital in May 2021 from investors including the Abu Dhabi Investment Authority (ADIA) and GIC (Singapore’s sovereign wealth fund), although TDR remains the controlling shareholder.
The new fund appears to be in bonds, not stocks. I’m not a financial analyst so I make this observation somewhat dubious, but looking at the reports available from the leading rating agencies, Fitch and Moodys, the majority of funds return to TDR, with the balance remaining in business.
Fitch describes the company’s financial policies as “aggressive” due to its high balance sheet leverage, and both currently display a negative outlook, i.e. they expect things to get worse rather than better.
What does all this mean in the real world of auto retail? I would suggest that means we should look at consolidators and newcomers in three categories, each representing a different level of risk in terms of their ability to keep their distance.
Trade buyers like Lithia and Vertu clearly understand the industry and are taking a relatively cautious approach to funding phased acquisitions.
I see their focus on building long term value. Constellation Automotive Group falls into the second category in my view, where it has a successful operational record in the sector but its ownership is reflected in more use of financial engineering to support rapid growth and potential profitable exits by current shareholders.
This is inherently riskier, especially with the various uncertainties that the sector is currently facing.
And then we have ‘houses built on sand’ like Cazoo where I think my views are clearly understood by anyone who reads my blog.
Consolidation in the retail sector has been going on for years and is accelerating as deals get bigger.
Nothing is going to change that, but we also need to understand the degree to which buyers have ‘skin in the game’ and therefore the likelihood but they will keep their distance from generating the benefits that can be derived from the consolidation process.
There is room for all types of players – including pure beginners, but we shouldn’t assume they are equal.
Steve Young is managing director of ICDP
[ad_2]
Source link
