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Lithia Motors: Pendragon Acquisition Finally Happening, Bringing a New Market Opportunity

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We are leaving our Lithia Motors LAD fair value estimate in place after modeling the firm’s announced acquisition of Pendragon, the U.K.’s third-largest auto dealer group. The deal is expected to close in the fourth quarter and bring annual revenue of about $4.5 billion. Lithia’s 2023 acquired annual revenue is now $8 billion and the firm is maintaining its 2025 revenue and EPS targets of $50 billion and $55-$60 per share. The purchase price is $350 million, or GBP 280 million, and will likely be financed via existing credit facilities and cash. Lithia had discussions last year to buy Pendragon, but they ended without a deal, so Lithia instead entered the U.K. this March via the purchase of Jardine. With both groups, Lithia expects to have 3.6% of the U.K. new vehicle market.

We like this deal because we think it’s at a very attractive price, brings a new market opportunity for Lithia, and Pendragon’s over 160 stores are mostly well north of London while Jardine’s roughly 50 stores are mostly in the London area. Lithia is buying Pendragon’s Evans Halshaw mass market brands locations, the Stratstone premium brands stores, the CarStore online used vehicle marketplace, and Pendragon’s vehicle fleet management unit. Pendragon’s remaining business is its dealer management system division, which will remain publicly traded in London and be a pure-play software as a service business called Pinewood Technologies. Pinewood has about 90% recurring revenue and EBITDA margins of about 60%. As part of the GBP 280 million purchase price, Lithia is spending GBP 30 million to own 16.7% of Pinewood Technologies stock, which according to Pendragon may increase to 19.84%. Lithia and Pinewood will each contribute GBP 10 million to form a joint venture to begin selling Pinewood’s DMS in the United States. Pendragon estimates the U.S. DMS market at GBP 2.6 billion a year but has other large players such as CDK and Reynolds & Reynolds. Pinewood’s 2022 EBITDA was $19 million per Lithia.

The author or authors do not own shares in any securities mentioned in this article. Find out about Morningstar’s editorial policies.

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David Whiston

Strategist
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David Whiston, CFA, CPA, CFE, is a strategist for Morningstar Research Services LLC, a wholly owned subsidiary of Morningstar, Inc. He covers the automotive industry, including dealerships, parts manufacturers, and automakers. He has covered the automotive industry since joining Morningstar in 2007.

Before Morningstar, Whiston spent four years in PricewaterhouseCoopers’ New York real estate audit practice and one year in its Chicago office working on real estate acquisition due diligence.

Whiston holds a bachelor’s degree in business administration with a concentration in accounting from the University of Richmond. He also holds a master’s degree in business administration with concentrations in finance, economics, and organizational behavior from the University of Chicago Booth School of Business. He holds the Chartered Financial Analyst® designation, and he is a Certified Public Accountant and a Certified Fraud Examiner. In 2012, he ranked first in the specialty retailers and services industry in The Wall Street Journal’s annual “Best on the Street” analysts survey. He ranked first in the same industry in 2011.

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