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Car dealers continue to hunt for small to medium-sized acquisitions in a still fragmented marketplace, despite mixed trading conditions in 2007.

Car dealers continue to hunt for small to medium-sized acquisitions in a still fragmented marketplace, despite mixed trading conditions in 2007.

Car dealers continue to hunt for small to medium-sized acquisitions in a still fragmented marketplace, despite mixed trading conditions in 2007.

The past 18 months have been eventful for Robert Forrester. Since leaving car dealer Reg Vardy plc after its £506 million sale to rival Pendragon plc in February 2006, he has taken a new business, Vertu Motors plc, from start-up to become the 11th largest car dealer in the UK.

After exiting Reg Vardy, Forrester was keen to get back into the sector believing there were still opportunities for car retailers, especially on the capital markets. This led Forrester, along with other former Reg Vardy executives, to come together during summer 2006 to develop the plan for Vertu.

“There were very few quoted motor retailers left [after the Reg Vardy takeover], which meant that there weren’t many fast-growth motor retailers that were quoted and I thought the investment community would be supportive of such a new venture,” he said.

Forrester’s hunch proved correct when Vertu’s £25 million AIM admission in December 2006 was oversubscribed.

This initial funding, along with a further £26.2 million raised in March, has been used to deliver on Vertu’s acquisition strategy. The company acquired Bristol Street Motors for £40 million in March, followed by Blake Holdings for £4.9 million in May.

Investors have continued to be impressed with Vertu, its share price standing at 78p at the time of writing, up from 63.5p on admission. Its market cap has grown to some £70.8 million.

That Vertu has become the 11th largest auto dealer after just two small to medium-sized acquisitions indicates how fragmented the market is. Indeed, according to Vertu, in 2005 there were more than 5,400 motor dealerships in the UK, with the 10 largest companies holding less than 19% of the market.

Forrester said the fragmented market is a legacy from the days of block exemption, where manufacturers had to give permission for a dealership to change hands and preferred to have a diverse ownership structure. With the abolition of block exemption in 2002, a flurry of M&A activity has followed in the sector.

These deals have included Lookers’ acquisition of 17 outlets during 2006, including Chrysler Dodge and Jeep, Land Rover and Lexus franchises. Its chairman, Phil White, recently announced the company is looking for further acquisitions.

Back in September 2006, Sytner Group acquired nine businesses – a mix of DaimlerCrysler and BMW and MINI dealerships – from Ryland Group for an undisclosed sum. Ryland has since been re-named Rybrook Holdings.

Elsewhere, Inchcape plc has been growing internationally, acquiring a 67% stake in the automotive retail businesses of Lithuania’s UAB Vitvela for up to £13 million in May. It has also made disposals in recent months.

Meanwhile, smaller companies have been active. For example, Sherwoods, a dealer based in Northeast England, bought Patrick of Stockton Vauxhall for an undisclosed sum in May. The deal – Sherwoods’ first – added to the company’s existing dealerships in Darlington and Northallerton in North Yorkshire.

But this is expected to be the company’s only deal for the foreseeable future. Principal Simon MacConachie, speaking to The Northern Echo newspaper, ruled out more acquisitions to avoid the possibility of growing too quickly, too soon in the “challenging motor retail market”.

Fierce competition

Challenges include fierce competition in the industry – an effect of a fragmented marketplace – and mixed market conditions. Pendragon, the largest group in the sector with some 350 dealerships, recently complained that demand for new cars in the first few months of this year was down on 2006. Rising interest rates will also affect the industry in the coming months.

Indeed, some dealers have already found conditions too tough. Discount car retailer CarShock, which had seven dealerships in Northeast England, collapsed in February with debts of £4.4 million. Administrator BDO reported that tightening margins were to blame for the company’s demise.

But overall market conditions are still favourable, which ensures that some businesses can fight back after troubled times. For example, Scottish dealer Shields Automotive was hit hard by the collapse of MG Rover in 2005, which contributed to the company making a loss of £913,000 for the year ending June 30, 2006, compared to a profit of £2.7 million for the previous 12 months. Its turnover also declined to £63 million from £66.1 million.

But after restructuring part of the business, Shields is on target to return to profitability after investment in new facilities and the addition of a Mitsubishi franchise, according to press reports.

Drive to consolidate

With the sector showing few signs of a recession, Michael Vassallo, an analyst at stockbroker Brewin Dolphin, believes that consolidation will continue, although big deals such as Pendragon-Reg Vardy are not on the immediate horizon.

Vassallo said bigger quoted groups are not ready for such a deal, they do not have the finances, are too heavily geared or are still digesting previous acquisitions. “Over the next six months I would be very surprised to see any of the larger groups buying each other,” he said. “These things go in cycles, so I’m sure they’ll happen at some point, but not right now.”

Indeed, Pendragon plans on making small purchases, according to Vassallo. “Pendragon [has] recently done a sale and leaseback and disposed of a number of dealerships and has plans to close a number of dealerships and sell the properties, which will free up a lot of cash for the business so it can start doing small acquisitions again.”

Vassallo said he expects other dealers to follow this trend, acquiring groups with up to 20 sites and paying less than £50 million for them. M&A activity will be primarily driven by smaller dealers with a handful of sites looking to sell out and cash in on the buoyant property market.

“There is an aging population of dealer principals, but primarily they’re looking at the property market… I’m sure they’re thinking they’d quite like to sell the property right now. That’s forcing a lot of people to sell out to the larger groups,” Vassallo said.

“It is also becoming more expensive to run a dealership, the standards the manufacturers want you to keep are becoming more expensive… there are lots more regulations. The overall market isn’t fantastic – its not as good as it was three or four years ago – and property prices are [now] fairly valued, and that is making a lot of the smaller groups sell out. There is going to be continuing consolidation.”

Marc Barber

Marc Barber

Marc was editor of GrowthBusiness from 2006 to 2010. He specialised in writing about entrepreneurs, private equity and venture capital, mid-market M&A, small caps and high-growth businesses.

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