A proposed merger lodged with the ASX would see Australia’s two biggest new-car dealer groups become one $1.8 billion entity, billed as ‘Australia’s leading automotive group’.
Queensland-based A.P. Eagers today announced the conditional all-scrip offer to acquire remaining shares of WA’s Automotive Holdings Group (AHG) that it doesn’t already control.
A.P. Eagers already owns 28.84% of AHG’s shares, meaning the proposed risk of a rival bid is seen as very low.
Under the offer, AHG shareholders (other than foreign shareholders) will receive one fully paid ordinary share in A.P. Eagers (APE share) for every 3.8 AHG shares owned.
The proposed joining of the two publicly-listed companies will give the market’s car brands and rival dealer operators pause for thought, and cause for concern. Australia’s car dealer ‘industry’ has a claimed annual turnover of $54 billion and employs about 70,000 people.
Contrary to popular perception, in the vast majority of cases car companies do not control their sales points/dealerships, but instead use a franchise model to save on overheads. Notable exceptions to this rule include Tesla and potentially Genesis, but they’re rare.
The merger proposal comes at a time when new vehicle sales have fallen for 12 consecutive months relative to the corresponding month in the preceding year, and more importantly at a time when dealership sales revenues and margins are at record lows.
Headwinds such as financial sector reform and a declining property market, as well as intense market fragmentation (70-plus brands competing for 1.15 million sales) creating downward unit price pressures, have conspired to create this situation.
Shares in AHG have reportedly fallen nearly 50% in the past 12 months, from $3.50 to $1.78 on Thursday.
Therefore, it’s not an entirely surprising development to industry watchers.
A merger of WA-based AHG ($83.1 million FY18 pre-tax profit)) and Queensland’s A.P. Eagers ($119.9m FY18 pre-tax profit) would create a formidable entity with the scale to lead market evolution and the clout to push-back on OEMs/car brands to whom it franchises.
The merged group would have exposure to motor vehicle retailing markets in all Australian States and Territories except the ACT, representing “approximately 11.9% of the Australian new vehicle sales market for the 12 months ended December 31, 2018”.
It would comprise 66 new car dealerships (22 car brands) in Queensland, 60 new car dealerships (22 brands) in NSW, 35 new car dealerships (17 brands) in WA, 31 new car dealerships (14 brands) in Victoria, 23 new car dealerships (12 brands) in SA, 12 new car dealerships (four brands) in Tasmania and two new car dealership (two brands) in the NT.
That’s 229 national new car dealerships, plus an additional 68 truck dealerships. This is a sizeable chunk of the industry, which the Australian Automotive Dealer Association (AADA) peak body claims comprises 1500 new car dealers operating 3500 outlets.
A.P. Eagers’ ASX market announcement also states that the proposed group’s Australian dealerships would represent 33 car brands and 12 truck/bus brands, including all of the top 26 car brands (2018 VFACTS figures) that represented 95.5% of the total market.
It would further comprise a huge chunk of sales sites for the top 10 brands, which make-up about 75% of all annual volumes. That includes 15 Toyota dealers, eight Mazda dealers, 14 Mitsubishi dealers, 22 Hyundai dealers, 18 Ford dealers, 13 Kia dealers, 24 Nissan dealers, 13 Volkswagen dealers, 8 Honda dealers and 20 Holden dealers.
It also promises “anticipated pre-tax cost synergies estimated at $13.5 million per annum if A.P. Eagers acquires a relevant interest in greater than 90% of AHG Shares (and therefore moves, by way of compulsory acquisition, to acquire full ownership of AHG)”.
We fully expect that such a proposal would draw the attention of the Australian Competition and Consumer Commision (ACCC) as time goes by, as well as the market’s bigger OEMs, which clearly may have some concerns with such a powerful dealer group changing the current market dynamic.
As well as the extraordinary market pressures, the dealer model is expected to rapidly change in the coming years, as more OEMs encourage their dealers to adopt online retail, shopping centre stores and activations, and retail and service hubs in unconventional locations given real estate pressures.
Any conglomerate such as the proposed A.P. Eagers/AHG entity would naturally have a competitive advantage over the majority of the market, controlled by small operators and family groups, on account of their greater scale and bargaining power.
If it gets ACCC sign-off and buy-in from AHG’s shareholders, then we might also see other (smaller) dealer groups in Australia look at a similar arrangement to counter. That’s purely speculation.
Commenting on the proposed transaction, A.P. Eagers CEO, Martin Ward, said the following:
“As AHG's largest shareholder, and as a leader in the automotive retail industry with 100+ years of experience and a track record of profitable growth and shareholder returns since listing in 1957, we are convinced that a combination of A.P. Eagers and AHG represents a compelling opportunity for both sets of shareholders."
“Our proposal brings together two highly complementary businesses, with enhanced flexibility."
“Importantly, the Offer enables AHG shareholders to participate in the upside and benefits afforded by A.P. Eagers’ proven management expertise and strategy which is expected to enable the combined group to grow and be better placed to respond to the rapidly evolving motor vehicle retailing market.”
This reporter has reached out to the ACCC for comment. Both the AADA dealer peak body and the Federal Chamber of Automotive Industries (FCAI) car company peak body declined to comment on the record, quite understandably at this early stage. AHG's spokesperson has also not yet responded.
UPDATE: Comment from ACCC
“We note AP Eagers’ intention to lodge an application for merger authorisation. We will have a close look at it when we receive that application.”