Private equity, disruptors, dealers – an unexpected trio

Most people looking at the three company logos in this blog would perhaps, at best, recognise only that of Marshall Motor Holdings – the 6th largest UK dealer group, number 12 in Europe, and the only one which is a consumer-facing brand.  However. the news this morning that the majority shareholder of the UK dealer group had accepted an offer for their two-thirds shareholding from Constellation Automotive Group is significant on a number of fronts, and raises a series of questions on others.  For those who don’t recognise the other logos, Constellation Automotive Group was better known until its rebranding as British Car Auctions, and includes the consumer brands cinch – an online used car competitor to Cazoo – and the buying site WeBuyAny Car.  TDR Capital is a private equity fund that not only owns Constellation, but also has a major stake in Leaseplan, about which I wrote a blog recently.  There is still the potential for other bidders to appear now that Marshalls is in play, and manufacturers will have to approve the transfer of the franchises to any new owner, but it does seem certain that control will change hands.  However, looking at the deal that is on the table raises some interesting questions and highlights a number of the challenges that are facing the distribution sector of the auto industry.

The majority shareholder in Marshall Motor Holdings is its former parent, the Marshall Group who floated a third of the dealer business in 2015.  They have a long history of being focused on their local community which the dealer group has expanded out from through a series of acquisitions in recent years, so that may be a factor.  But they may also have been influenced by the fact that despite almost doubling the size of the business, maintaining profitability in the low 1% range (unspectacular, but typical of a UK group), the share price has not followed.  This is not unique to Marshalls – the ratio of share price to earnings per share (P/E) for UK dealer groups is typically less than 10, compared to over 20 for general retail in the UK and more broadly across Europe.  If you are a financial investor with no special factors influencing your choice, as Marshalls Group now is, you can clearly find more attractive places to invest your money.  Motor retail carries a stigma of having an old business model that restricts returns and is at risk from disruption – those of us in the industry might argue that is an unfair characterisation, but for the investment community perception is reality.

Which then brings us to the bidder – Constellation Automotive Group.  Questions were asked about potential conflict of interest when they switched cinch from being a B2C used car listing platform offered to the existing dealer clients of BCA to being one where they instead had their own inventory, sourced through their remarketing deals and the WeBuyAnyCar consumer-focused channel.  With the Marshall deal, they will now have a major dealer group in-house, also competing with the other dealer clients of BCA for stock, and Marshalls themselves will be competing with cinch in the used car space.  Will there be some sort of triage process that determines whether an incoming used car from a remarketing client goes to Marshalls, cinch or open auction?  From an internal perspective, it is unclear to me that having a major dealer group within the Constellation family will directly improve used car supply for cinch, although the existing reach of Constellation into other European markets could provide a platform for Marshalls to expand their presence into continental Europe.

Considering TD Capital at the top level of this deal, and their involvement in Leaseplan, they are building a broad position in downstream automotive.  This gives them the flexibility to respond to whatever direction the industry heads in terms of ownership vs usage, online vs physical, and the whole vehicle lifecycle.  Supporting the Marshalls deal is significant as private equity has not previously been interested in automotive retail – relating back to the generally negative view of the sector I referred to earlier.  If this deal goes ahead as currently proposed, it may herald a new phase for the investor profile behind dealer businesses, that may not initially appeal to the manufacturers as private equity funds are not normally long-term investors.  However, the concern that they may have, could be reduced if the involvement of private equity helped accelerate dealer investor consolidation, and ramped up in parallel to changes in the manufacturer-dealer relationship through agency formats or modifications to franchise contracts that both have the effect of limiting the entrepreneurial opportunity in dealerships.

Whichever way you look at the thinking behind this proposed deal, and how it plays out for the various parties involved, there are questions to which we don’t yet have answers, and those answers may not become clear for some time.  On that basis, I think that it will be some time before the stars form a meaningful pattern in this particular Constellation.