John McConnell

MANY issues stand in the way of the successful creation of an ambitious $1.8 billion car and truck retail empire – combining Automotive Holdings Group Ltd (AHG) and AP Eagers Ltd (APE) – that has shaken the automotive industry and generated a mixed reaction to the merger proposal.

The most common reaction is that there are plenty of observers who think that the price placed on AHG shares is “a steal” and something you would expect in the opening salvo from the opportunistic and canny car retailers on the board of APE who make up 40 per cent of the share register.

An early hurdle will be the regulator. The instigator, APE, which has proposed a 3.8:1 share swap in its bid to take over AHG without forking out a cent*, needs the approval of the Australian Competition and Consumer Commission (ACCC).

The ACCC would consider the relevance of having a retail group that will control 11.9 per cent of new-vehicle sales of through 242 car dealership sites and 29 truck locations in Australia and New Zealand.

However, the consensus is that the ACCC will look at the merged company’s 12 per cent market share and not regard that as even coming close to market dominance.

Other questions being asked around the industry include:

● Would the proposed group become the handmaiden of the OEMs as an outlet for over-supplied cars to the competitive detriment of smaller dealers?

● Will there be rationalisation of duplicated dealerships providing opening for other dealer groups to pick up key sites?

● Would consumers be in a better or worse position with one super dealer group?

● How would the merger affect staff and management?

● Would the two different approaches to used cars by each group, Easyauto 123 and Carzoos, live on separately or would one be closed?

Meanwhile, shareholders will also have to learn more about the benefits of the proposal, particularly the possibility of diminished performance of one company as it becomes absorbed into another.

The 3.8:1 share swap valued AHG earlier this week at around $2.00 a share. The bid was made on April 5 when AHG was $1.78. It closed on Tuesday, April 9, at $2.10. That premium could keep AHG shareholders on the registry with many able to remember that within the past 52 weeks, AHG has been as high as $3.52, recorded in May 2018.

APE has a less erratic share history and commands a stronger market price ($7.62 at close of trade April 9), with a registry dominated by Sydney-based businessman Nick Polites (holding 36 per cent) who started buying AP Eagers shares in 2000 and has not sold any since.

A resurgence in AHG’s share performance, driven by its corporate position, is the third factor. APE, which owns 28.84 per cent of AHG, has already valued AHG at a price commensurate with the share market.

But AHG has not fared well recently as its financials are eroded by a number of problems:

● The tightening F&I sector

● The loss-making Refrigerated Logistics division

● The continued weakening of the car market, especially in its home ground of WA

● The investment AHG is making in the rollout of Easyauto 123 used car barns which has yet to be fully realised.

So the proposal is opportunistic because the fundamentals are still strong and the issues are cyclical.

AHG booked revenue of $5.6 billion from its automotive (cars and trucks) division alone in the 2018 calendar year compared with APE at $4.1 billion.

It is also the bigger of the pair, with AHG having 180 franchises under its wing compared with APE at 145.

Now the waiting begins.

AHG boss John McConnell has made only general comments until the offer has been digested and the bidder’s statement is sent to shareholders, scheduled for April 23. Given that timeline, AHG has until May 8 to file its target statement response.

In a report published in The Australian newspaper, Mr McConnell said: “At the end of the day this is a process that will require time and a careful consideration of the offer.

“It is not something that is going to be rushed. We will carefully consider the offer in its totality including looking with financial advisers at the merits of the valuation of the business.”

Of the potential merger, he said there were some advantages “but equally we have the opportunity as AHG to continue to grow organically and develop our own business as well in isolation”.

The Federal Chamber of Automotive Industries (FCAI) and Australian Automotive Dealer Association (AADA) have declined to comment, leaving the result to market forces. Individual OEMs said the same, with a few commenting that it was early days.

*The CEO of AP Eagers, Martin Ward, told GoAutoNews Premium: “The investment community have all given the merger and pricing a massive thumbs up for both sets of shareholders.

See: Colourful appraisal of APE/AHG merger

“I don’t see many issues at my end as we are getting tremendous support from all stakeholders. A few standard hurdles that we will be able to navigate.

“I should also highlight any share we issue is hugely valuable and to suggest that we aren’t forking out a cent suggests that the 62,102,804 APEagers shares required to be issued to merge the two groups aren’t “cents!” Every share being issued can be converted into hard cash if somebody wants cash. The reason it’s 100 per cent shares is so that their (AHG) shareholders can share in the upside of the combined group particularly the shared “cost Synergies”.

“The reason this has been so supported by the investment community is because it is paid for in shares rather than cash,” Mr Ward said.

By Neil Dowling and John Mellor