Lithia Motors: Rivals Force a Higher Price for Pendragon Acquisition
Lithia’s LAD agreement to buy the U.K.’s third-largest auto dealer, Pendragon, as discussed in our Sept. 18 note, brought subsequent rival bids from Penske Automotive Group and AutoNation, both for 32 pence per share. On Oct. 2, Lithia announced a new agreement with Pendragon for higher consideration equivalent to 35.4 pence per share. Cash paid by Lithia will now be GBP 397 million, up from GBP 280 million, and we are leaving our fair value estimate unchanged. The deal’s structure is not different from our Sept. 18 note and includes GBP 30 million paid by Lithia to acquire 16.7% of Pendragon’s remaining operations, which will become a publicly traded software as a services company called Pinewood Technologies. The extra GBP 117 million cash contribution is entirely for 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.
Pinewood will continue to sell its dealer management system, or DMS, and Lithia and Pinewood will each contribute GBP 10 million to form a 51% Lithia-owned joint venture to start selling Pinewood’s DMS in the United States. Lithia also announced on Oct. 2 that it has obtained preliminary commitments from major dealers to increase Pinewood’s DMS U.K. user count by 7,500, which, when added to Lithia’s 2,500 intended users in the U.K., would be about half of Pinewood’s growth objective for fiscal 2027. The deal remains expected to close in the fourth quarter.
It is unknown if Penske, AutoNation, or perhaps Group 1—which also has U.K. stores but has not bid on Pendragon—will make further bids, but it appears to us that Pendragon prefers Lithia. We can understand why because only Lithia’s offer provides the upside of Pinewood and the joint venture. We felt on Sept. 18 that Lithia was paying a great price for Pendragon, so perhaps Lithia’s competitors were partly interested in seeing it pay more for a top U.K. asset.
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