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Pendragon: what should investors make of the three-way M&A pile-up?

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There is widespread consensus that UK stocks are, for the most part, extraordinarily cheap. Yet, despite the collective hand-wringing, public markets have not moved to correct this anomaly. That leaves many a company idling by the roadside. 

One strategy for stalled British stocks is to cast around for a takeover offer. This process gives shareholders the option to either sell out (preferably above current prices) or decide there is value in the old banger after all. 

Better still, once a company does attract a bidder, other would-be acquirers are forced to step on the gas. For an example of a veritable bid pile-up, look no further than Pendragon. The UK car retailer has in the past week received offers from three US peers, one of which has teamed up with its own major shareholder, Sweden’s Hedin.  

Receiving a clutch of bids can put shareholders in a tricky position — especially when it is not immediately clear which one offers superior value or will actually materialise. Company boards are on hand to proffer recommendations. But the canny private investor will also want to make up their own mind about which offer — if any — merits snapping up. 

The first thing investors should consider is which bid is higher. In the case of Pendragon, they are not directly comparable.

The first, initially recommended by the board, was from $8bn market value Lithia Motors. It has offered to buy Pendragon’s UK cars business for £250mn It would also inject £30mn of capital into a division that sells software for car dealerships, securing a 16.7 per cent stake. This software unit would continue trading under Pendragon’s listing.

Pendragon share price chart in pence, Two thousand and twenty-one to twenty twenty three

Shareholders can also choose from another two non-binding bids, by Sweden’s Hedin and the US’s AutoNation, which value the whole of Pendragon at £447mn. 

A quick look under the bonnet suggests Lithia’s is the less attractive offer. Pendragon’s investors would get £250mn for the motor business and be left with 83 per cent of the software business, valued at £150mn. That is a total of £400mn, some £47mn less than alternative bids.

But investors should also ask whether any of the bidders can deliver on their promises. Hedin, which owns 28 per cent of Pendragon, disappointed shareholders last year when its bid for the company failed. This time around, its interest is subject to a number of preconditions. And Hedin’s own bid may cause AutoNation’s deal to misfire. After all, even if AutoNation wins, it risks getting stuck with a large, recalcitrant shareholder.

The two companies only have a week or so to finalise their offers and seek a board recommendation. Lithia, which does not want its own bid shopped around the market, has made it conditional on securing shareholder approval by October 6.

Private investors will hope Pendragon gets an auction under way. Lithia’s bid has been useful to get the ball rolling. But, by valuing the motor business at only 3.5 times this year’s ebitda, it has a whiff of the lemon about it.

Car dealerships such as Pendragon hope to navigate the disruption caused by electric vehicles — though the likes of Tesla tend to skip the middlemen and take their sleek offerings directly to consumers. Other areas of the economy — including car manufacturers — are going to have to adapt faster than they thought. There are signs that electric vehicles have already reached a tipping point.

Bar chart showing UK car registrations since mid two thousand and forteen

Europe’s demand for EVs is such that politicians worry about a flood of imports from China. An EU trade probe on production subsidies has begun. About 20 per cent of all EVs sold in Europe are produced in China.

About 26mn EVs have been sold worldwide to date, according to the International Energy Agency. These include plug-in hybrids, which have an internal combustion engine alongside a battery. That is a fraction of the total car stock of 1.3bn. But sales are revving up. They are set to increase from about 10mn in 2022 to about 14mn in 2023 — 18 per cent of all cars sold.

Drivers making the switch can expect to save money, though the exact figures depend on local electricity prices. Greater efficiency makes EVs cheaper to run. Assume, for example, that UK drivers charge their EVs at home for 32p per kWh and that cars travel 5km on each kWh. That equates to 6.4p per km. Diesel cars, meanwhile, might be able to do 15km on one litre, which at present costs 152p. This means they are paying 10p per km.

In terms of initial outlay, EVs are becoming more affordable. The cheapest Tesla Model Y ($46,900) now costs less than the average amount paid for a new car in the US. Chinese carmakers known for their cheaper models are setting their sights on increased exports to the US and Europe.

Slow charging times and the need for comprehensive charging infrastructure remain barriers. But forecasts for EV sales suggest rapid growth over the next few years. Bernstein analyst Oswald Clint superimposed EV growth trajectory on that achieved by the internal combustion engine at the start of the century and found that the curves matched.

The implication is clear: within the next decade, there could be 800mn battery, plug-in and hybrid electric vehicles on the roads.

Lex is the FT’s concise daily investment column. Expert writers in four global financial centres provide informed, timely opinions on capital trends and big businesses. Click to explore

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