Doing deals for dealers

You might recall that a couple months ago, I commented in my blog on the acquisition by Constellation – the parent company of British Car Auctions and online used car retailer start-up cinch – of a majority stake in Marshalls Motor Holdings, the 6th largest UK dealer group, 15th largest in Europe.  This morning we had an announcement that they have followed this up with the purchase of a 19.9% stake in Lookers, 3rd largest in the UK and 5th largest in Europe, paying a premium of around 25% for their stake.  The intention with Marshalls is to acquire the balance of the shares, requiring a total investment of almost €400 million.  The initial Lookers stake has cost them almost €100 million in addition to that, and a full bid would most likely require close to €500 million more.  It seems likely that have ready access to the funds.  Despite ongoing losses at cinch, there will still be some left over from the £1 billion raised from investors last May.

It does however bring you back to the question ‘why?’  Whilst a guaranteed supply of used cars remains the main strategic challenge for the new breed of used car retailers in Europe such as autohero, cinch and Cazoo, the successful dealer groups have sophisticated omni-channel used car businesses of their own.  They do not have surplus good quality stock, and the dealers and used car specialists compete in the market in terms of the offer, age and price.  Drawing used car stock off a dealer group only harms the business, with a potential knock-on effect on reduced aftersales business as well.  At a time when there is uncertainty over how manufacturer moves towards agency or modified franchise contracts will affect dealers’ new car business, the last thing you need to do is to damage the used car and aftersales money machines.

Without the benefit of any inside knowledge from Constellation, you therefore have to assume that they (and by extension, their parent private equity group, TDR Capital) see traditional automotive retail as a complementary extension to their other businesses.  They have not been as openly critical of the traditional dealer business as Cazoo, where founder Alex Chesterman claimed (wrongly) that the used car industry had “a complete lack of online penetration”, that showrooms “have only a couple dozen cars to view” and that the market is “flawed on every level”.  I’m not sure what planet Mr Chesterman is on, but it’s certainly not the same one as the UK dealer groups and leading independents, who have scale, have invested heavily in digital channels and tools, and are working on multiple fronts to adapt their staff profile and rewards to suit.

Mergers and acquisitions (M&A) are not unique to the UK.  In December, Hedin (who also still hold a 26% stake in Pendragon) completed their purchase of the Stern dealer business in the Netherlands, and we have noted a number of smaller deals in recent months in France and Germany, involving domestic consolidation.  However, we are aware of interest from other trade investors and private equity funds in domestic and cross-border deals, so anticipate that the deal volume will grow this year.  Although a Lookers-Marshalls combination would almost certainly trigger a competitions authority investigation and close scrutiny from some manufacturers who would be uncomfortable with the consequent concentration of retail share for their brand, the sector remains relatively unconsolidated.

Cross-border deals are by their nature unlikely to trigger competition concerns, and instead provide the opportunity to apply the skills, knowledge and investments from more sophisticated markets to others where dealers lag behind in digitalisation and maximising the opportunities from all business areas.  New players in these markets may in turn spur the better domestic players to accelerate their own activities, rather than risk being pushed aside by the newcomers, or becoming a target.  This effect – where M&A activity drives a general improvement across the sector – is welcomed by manufacturers, and some have told me in the past that they would welcome a move by UK dealer groups into Continental markets.  In my view, this applies not only to UK groups, but also to some from the Nordics and Benelux who are equally advanced.

My view from the outside is therefore that the latest move by Constellation, and probably the earlier acquisition of Marshalls, is not intended to support the cinch business (as Cazoo was forced to do when it acquired Imperial Car Supermarkets in 2020), but represents a parallel strategy to grow a large scale dealer business.  Whether that will remain fronted by Constellation, or will be spun out as a new holding business within the TDR portfolio is an open question, and probably more related to the inner workings of private equity funds than anything else.  It may therefore be the first substantial move in dealer consolidation in 2022, but it will not be the last, and might not turn out to be the largest.