Weak pound drives North American takeover of UK dealers

UK-based dealer groups are proving irresistible targets for overseas buyers - particularly those based in North America – tempted by both the weak pound and the quality of the businesses themselves. On Monday, Pendragon – owner of brands such as Stratstone and Evans Halshaw - said it would sell its dealer network comprising more than 160 sites and leasing company to Oregon-based Lithia Motors for £280 million. The deal grows Lithia’s UK presence after the company agreed to buy Jardine Motors Group in March in a deal reportedly worth £300m-£400m. Jardine currently operates more than 50 dealers. Meanwhile, Canada’s Alpha Auto Group is reportedly nearing finalisation of its deal to buy the Lookers group with 150 locations after the company upped its offer to shareholders. Already operating in the UK is Houston-based Group 1 Automotive, which as of September last year had 79 franchises in the UK after steadily growing its presence since 2007. The largest of all foreign-based dealer groups currently operating in the UK is Michigan-based Penske, which runs 146 dealerships here after taking over Sytner back in 2002. Assuming the Pendragon deal goes through, Lithia would overtake Penske as the UK’s number one group in terms of outlets and run it close on revenue. The principal foreign dealer group operating here not from North America is Sweden’s Hedin Group, which took over the Stephen James Alliance, a Mini-focused group, in August to add to its south-east-based network of Mercedes and Smart dealers. Hedin has been a long-time suitor of Pendragon’s and as its largest shareholder could yet block the Lithia deal. The appeal of the UK’s largest dealer groups are twofold, says Steve Young, managing director of automotive sales analyst company ICDP. First is that outside groups see them as a bit of a bargain thanks to “relatively low valuations and a weak pound”, Young told Autocar. The dollar is currently trading at $1.23 to the pound, close to the level after the Brexit vote in 2016 and well down from over two dollars in 2007. Second is the quality of the business themselves. “UK auto retail is some of the most advanced in the world, so the buyers are getting good sophisticated businesses who generally perform well in new cars, used cars, F&I [finance and insurance] and aftersales,” Young said. “This is not true in all markets.” UK groups also operate in a similar fashion to US counterparts in that companies will amass a number of outlets to streamline sales processes and stock, making them easier to absorb into a bigger group. Key to that has been efficient digital management and the Lithia deal includes taking a 17% stake equity in Pendragon’s well-regarded Pinewood dealer management software business, which would become a stand-alone company under the terms of the deal. The UK car market also closely resembles that of the US in that sales in both regions are strongly driven by finance. The aggressive move into the UK market by US groups is interesting for the fact that none is deterred by the increasing trend for car companies selling in the country to switch to the ‘agency’ sales model, whereby dealers are paid a fee to sell cars on behalf of manufacturers. Lithia CEO Bryan DeBoer said on his company’s second-quarter earnings call the firm was picking up “great learnings” from Mercedes’ switch to direct sales in the UK, referencing the Jardine ownership. The new sales model shows “how a manufacturer and a retailer can work together to create better experiences for our consumers” he said. Penske said in March it was seeing profits increase on new Mercedes sales in the UK thanks to the agency model. Despite the strong push by the North Americans to own the cream of the UK’s dealer groups, overseas ownership of UK franchises would still only be around 18%, Young estimated, adding that foreign ownership of local dealer groups is higher in the Netherlands. However, that figure could change as acquisitive dealer groups with expansion plans dig deeper into the UK market on the lookout for cheap deals.