21 November 2019
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Should you trade in your Automotive Holdings shares?

Tim Boreham
2 May 2019

On opening its on-market offer last week for Perth-based car dealer chain Automotive Holdings Group (AHG) $2.40, AP Eagers (APE) $8.68 hoped for a swift endorsement of the union that would combine the industry’s biggest and second biggest players.

The 106-year old, Brisbane based Eagers is certainly in the driver’s seat on this one, winning acceptances of 22% as of Tuesday night. Given Eagers’ starting stake of 28.83%, it’s zoomed past the 50.1% control threshold like a well-tuned Ferrari.

But a key point about the institutional facility is that the big guys can reverse their pledges. Not so AHG’s retail holders, who have been advised by their board to do nothing for the time being.


With the offer subject to approval from the Australian Competition and Consumer Commission (ACCC) – a process that will take at least 90 days – there’s still scope for unexpected twists and turns.

Also, the attitude of the car makers towards the configuration and concentration of their dealerships could put a spanner in the works.

Given the geographic compatibility of the two groups, the merger certainly makes sense on paper.

To be called Eagers Automotive Holdings, the $750m engorged entity would have 229 outlets (plus 13 in NZ) as well as 68 truck and bus dealerships.

But value is another issue altogether, with AHG likely to argue that the Nick Politis-controlled Eagers simply isn’t offering an attractive enough ‘trade in’ deal to its holders.

We await AHG’s target statement due on May 9, which will include an independent expert valuation from KPMG.

AHG has certainly been navigating the odd pothole or two: it tried (and failed) to offload its refrigerated logistics division and has been severely affected by a regulatory crack down on dubious dealer insurance and finance products two years ago.

After running hot for years, new car sales have stalled like a Trabant on an incline: industry data for March shows a 5.8% decline on a rolling annual basis.

But Eagers is pleading the bigger picture, arguing the merged entity would be better placed to cope with longer-term structural changes in the industry that will influence the nature – and location – of dealerships.

“In our view the changes in our industry are not just cyclical: structural changes are already playing out and there will be more over the decade,” says Eagers CEO Martin Ward.

Just as Dodgy Dave’s car bazaar in Parramatta Road has become a threatened species, the glitzier main street outlets with capacious stock and servicing facilities also look like becoming a relic of the past.

According to a recent KPMG survey of car executives, half of them expect physical dealer outlets to shrink by 30-50% by 2025.

Eagers has been toying with Carzoos, a shopping mall based outlets featuring ipads rather than demo vehicles.

After agreeing on the used car and the price with the salesperson (sorry, “Carzoos Buddy”) the vehicle is delivered to the customer who has seven days to return the model if it doesn’t spark joy.

Carzoos will also throw in a 175,000 km warranty and a year’s free insurance. Drive away, no more to pay!

AHG has not been sitting idly on the bonnet either, with a used-car variation called easyautos 123 based on price guarantees and a ‘no haggling’ policy.

Customers in any of the five outlets can access vehicles held elsewhere and gain access to stock from the company’s Carlin’s auction business.

On paper the fit is a snug one because Eagers is strong in Queensland (where AHG generally isn’t), while AHG has an over the odds presence in WA and NSW, where Eagers is underrepresented.

Eagers is also strong in South Australia, Tasmania and the Northern Territory, where AHG has no presence.

But given the inevitable cross over and given the evolution of dealer outlets to smaller mall-based or multi-use facilities, dealer rationalisation looks inevitable.

Bell Potter notes AP Eagers land is valued at $340m, but could be worth much more on market. Eagers has just sold three properties at its Brisbane spiritual home at Newstead – to be vacated in favour of a new super site at Brisbane Airport - for $55m.

AP Eager’s scrip offer (of one of its own shares for every 3.8 AHG shares) comes after AHG was forced to cancel it half year dividend after reporting a $229m loss after a $234m asset write-down pertaining to the value of the cold logistics arm and the car dealerships.

The truckin’ division was meant to have buffered the company from cyclical car business. But it proved more of a management distraction as the boardroom discussion became more about the volume of mango shipments than Mazda sales.

AHG had lined up the sale of the business to China’s HNA International for $280m, but the buyer went as cold as the contents of the B Doubles (like Jon Snow, the sale process has been revived from the dead).

While the on-market offer is not subject to any minimum acceptance conditions, there’s no finality until the ACCC ponders its position. According to the AHG camp, the Newcastle and Brisbane markets could present problems.

The merger also needs the imprimatur of the 47 car makers involved, with some entitled to ‘change of control’ powers on the AHG side. We’re not sure how potent an obstacle this is, but the manufacturers need to be comfortable with Eagers’ ‘omni channel’ push and the dealer overlaps the union is likely to produce.

In the meantime, enough of the large frustrated AHG holders have spoken to give Eagers control of its quarry – provisionally at least.

But for the bulk of AHG’s holders it’s a case of manana manana: they won’t get their Eagers shares until the approvals are won and if they sign over their AHG shares now they can’t sell them on market at a potentially higher price.

Tim Boreham edits The New Criterion

Disclaimer: The companies covered in this article (unless disclosed) are not current clients of Independent Investment Research (IIR). Under no circumstances have there been any inducements or like made by the company mentioned to either IIR or the author. The views here are independent and have no nexus to IIR’s core research offering. The views here are not recommendations and should not be considered as general advice in terms of stock recommendations in the ordinary sense.

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