Automotive retail M&A - our predictions

Strong international interest to remain 

The interest of international investors in the UK automotive market has continued, following the boom in overseas activity a few years ago. International owners were involved in 22.5% of transactions in the last two years. While they are more cautious in their outlook as a result of Covid-19, based on our recent discussions we envisage this increasing further, particularly whilst exchange rates are so attractive. Buyers from the UAE, USA and East Asia remain extremely focused on the UK as a robust economy to make an investment. 

The tech opportunity 

We are seeing significant activity within this area, with Covid-19 accelerating the tech journey for many dealerships. Not only has there been progress within dealerships, but the software and tech providers themselves have become hugely attractive assets. We have already seen the likes of Codeweavers, enquiryMAX and Rapid RTC purchased in the first couple of months of this year and are aware of a number of other transactions currently in progress, with interest from private equity as well as larger consolidators. 
Recurring revenue and growth opportunity is certainly driving the multiples for these businesses through the roof, with Covid-19 perhaps limiting the number of viable investment opportunities available out there. Exciting times in this space for sure.

Property values

With property values coming under scrutiny during 2020 due to the significant uncertainty, we were seeing up to 15% variance in current value versus historic valuations. This was highly frustrating as, fundamentally, nothing within the business or property had changed. It certainly posed a challenge in the transactions we advised on in 2020, with substantial variances from industry professionals.  However, on the back of strong trading performances and with the release of the Government’s roadmap out of lockdown, property values have recovered and industry commentators appear much more comfortable in their valuations, which is pleasing to see. 

Brands of the moment

Having been through a period over the past five years where premium brands such as Mercedes, Audi, JLR and BMW have been top of people's shopping lists, we have seen a marked change in this area. Whilst premium businesses are undoubtedly still attractive, there has been much more focus on the likes of Kia, Toyota and Lexus, with substantial goodwill payments being tabled for these opportunities. The ever increasing focus on EV technology is also becoming a consideration for businesses when contemplating an acquisition which again suggests a slight mind set shift to the medium/long term outlook for the sector.   

Distressed opportunities 

We believe that values will remain stable during the remainder of 2021, however it is likely that distressed opportunities will come to the market as we head into 2022. Government support will need repaying and high levels of unemployment are likely, therefore the market may become more challenging for those businesses without appropriate controls in place. We are, however, confident that strategic, well prepared businesses can still achieve good value in 2022. 

Lack of banking support to remain an issue 

The lack of mainstream banking support for the sector remains a real brake on both the organic and acquisitive growth prospects. Motor retail businesses continue to be placed in the general retail basket and we see no change to this outlook in the near future.  Fortunately the manufacturers' captive finance companies have been helpful in addressing some of these issues, particularly BMWFS, TFS and VW Bank.  

The road ahead

Although transaction numbers have reduced considerably, this is no surprise given the uncertainty that engulfed 2020 and has followed us into 2021.

Looking to the latter parts of 2021, we see a return to a more normal level of market volumes and indeed the potential for some degree of pent up demand, particularly if the financial performance of the average motor retailer continues at the strong levels seen in 2020.

We expect to continue seeing strong demand for the right business, however, it is critical to identify the strategic buyer early in a process to deliver maximum shareholder return.  Opportunities will continue to become available as larger groups trim their portfolios and smaller dealer groups come under greater financial pressure and scrutiny, therefore looking to exit. The de-consolidation of the PLCs will bring opportunities for those well placed privately owned businesses with funds in place to make strategic acquisitions. 

Want to know more?

In our 2021 Automotive Outlook, we discuss the transactions market in more detail and take a look back at an extraordinary 2020 and share our predictions for 2021 and beyond. We discuss how the industry has come together to navigate the unknown and hear from a number of industry experts; it's a must read for anyone in the sector.