Car buyers are often advised to change vehicles every three years to maximize value. In an interesting turn of events, British dealership group Lookers is now recommending the same approach to its owners.
Almost three years ago, Lookers faced near catastrophe due to fraud allegations. However, after a comprehensive rebuild, the company’s board has recently decided to endorse an offer from Canada’s Alpha Auto Group (AAG).
AAG is offering 120p per share, representing a 42% premium to the three-month undisturbed price. This offer values Lookers at an impressive £929mn ($1.2bn), including net debts. Such a high valuation, the highest in six years, should hold considerable sway, especially considering Lookers’ status as a consistent earner is being threatened by falling car prices and market disruption.
The limited availability of new and used cars has kept prices at a high level, which has allowed Lookers to achieve record-breaking profits. However, Auto Trader reports that vehicle price growth has slowed considerably this year. This profitable streak is unlikely to endure as competition intensifies. Well-funded online vendors have invested heavily to gain market share.
Online competitors are just one threat to profits. Car manufacturers have also benefitted from tighter supplies of new vehicles, and they are unlikely to loosen their grip on the supply chain. Dealers may have to sacrifice margins to satisfy carmakers, potentially leading to further consolidation in the industry.
This potential consolidation could mirror North America’s dealer model, which consists of fewer but larger dealerships. AAG, a privately owned company, operates only 15 dealerships compared to Lookers’ 150 sites. Sales per dealership at US counterparts Penske Automotive and Lithia Motors are double and almost triple, respectively, those of Lookers. The higher profit margins and valuations of US peers reflect the economies of scale achieved through this approach.
Despite AAG’s intention to align the market with the American model, it is unlikely that they would be willing to pay a higher price. They have already offered eight times Lookers’ forward earnings. UK competitors Pendragon and Vertu trade at lower multiples of 5 and 6, respectively. With 40% of shareholders, including Cinch owner Constellation Automotive, already committed to the deal, other shareholders should recognize that now is an opportune time to exit.
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