Lithia and Hedin filed unsuccessful bids for Pendragon. The group is now “very visibly” in play, says Steve Young
A feature of the UK car retail market is the dominance of large dealer groups. The top 10 groups held more than a quarter of the total new car market in 2019, and the top 50 groups held half of the market. The evolution of the groups as integrated operations began with the formation of Pendragon, which emerged from a diversified conglomerate in 1989 with 19 dealerships initially. A series of significant group acquisitions fueled growth, supported by the development of a standalone used car brand, the purchase of a DMS developer (Pinewood) and the growth of central and divisional shared services. There have also been efforts to expand outside the UK, with businesses in Germany and the US almost all sold, and some shake-ups in the growth trajectory. After being the largest dealership group in Europe for several years, they have now slipped to sixth place in terms of new car retail volume.
Unfortunately, in recent years the company has become known more for its management problems than its business innovation and success after the departure of longtime CEO Trevor Finn, a short-lived replacement, and then the appointment of former Autonation boss Bill Berman. which sparked controversy for its bonus packages. Ownership has become concentrated with the Swedish dealer group Hedin holding 27% and four investment funds holding a total of 38%, all obviously anticipating an imminent change of ownership, Hedin having been considered the obvious candidate so far, having already made acquisitions in Belgium, the Czech Republic, Finland, Hungary, the Netherlands, Slovakia and Switzerland last year. Pendragon’s board rejected a takeover bid from Hedin valuing the business at £400million in March this year, but it was expected to be only a matter of time before ‘they don’t come back with an improved offer.
In the past two weeks, that assumption has been challenged by the announcement of an approach, originally described as coming from a “big international company”, which was conditional on the support of the five major shareholders, but had failed after one of five rejections. the offer. The mystery bidder was revealed to be Lithia Motors, one of the few publicly traded US dealership groups, with sales of $21 billion last year, about 50% more than the most large group of distributors/dealers in Europe, Emil Frey. The offer was only marginally better than Hedin’s rejected offer, but the board was to recommend it, possibly reflecting the strained relationship with Hedin. We now look set for a battle between Hedin and Lithia to gain control of Pendragon and secure a position as one of Britain’s largest dealer groups. If Hedin is successful, it will move them up the European charts to roughly level with Penske, battling for second place.
Penske and Group 1 are the two existing US investors in UK automotive retail, but there are also a range of other foreign investors present, including Chinese, Middle Eastern and South African, all present in the British Top 50. Last December, I wrote a blog about the cross-border expansion of dealer groups in Europe, and there was a succession of deals that continued into 2022. Selling Pendragon to an overseas buyer would only continue this trend, although the scale is obviously larger. As I mentioned in this previous blog, the potential operational synergies to be realized in these long distance international acquisitions are limited. There is very little a Swedish or US investor will be able to do on a group basis that benefits a UK-based company that already has substantial scale. The question then is what is the logic of such an agreement?
An unusual feature of Pendragon is that it still owns Pinewood, the dealer systems provider I mentioned earlier. Some analysts suggest that Pinewood alone is worth almost the full share price currently applied to Pendragon. Given the growing importance of IT in an omnichannel world, the acquisition of this gem alone could almost justify the acquisition of the whole group.
Beyond that, Pendragon’s corporate issues have likely gone almost unnoticed by the buying public, which only sees the retail brands of Evans Halshaw, Stratstone and CarStore. As a former customer I can vouch for weaknesses in customer service and as an industry observer I can identify past innovations that have not been fully exploited or have been discontinued, perhaps for the wrong reasons. There is therefore some recovery work to be done operationally on Pendragon, but the raw material is there. What is needed is a return to stability, and in-depth management that can move the company forward and match the performance of other major British groups.
Both Hedin and Lithia have the ability to pull it off, and now that Pendragon is so visibly in play with such big suitors, there must be every chance that one or two more will be drawn to the party. This must be good news for Pendragon, its customers and the OEMs who still rely on them to sell one in every 30 cars in the UK.
• Steve Young is Managing Director of ICDP