The key dynamics impacting mergers and acquisitions
in 2021

However, Government ensured that many companies have been supported financially through difficult times. The extension of the furlough scheme has supported job security to September 2021. With better than expected liquidity in the economy this has enabled some companies to undertake acquisitions.

The fact that the Government might have increased capital gains tax (CGT) in the March 2021 Budget - a route to bring down public sector debt of £2.13 trillion (source, ONS) – encouraged many company owners to accelerate plans to dispose of their business before any announcement could take place. Although the increase in CGT did not form part of the March 2021 Budget, there is growing speculation that such an increase could take place. 

At both ends of the spectrum – the upstream (manufacturing) and the downstream (customer-facing service companies) – consolidation is taking place, exacerbated by wide ranging changes in the automotive market:

• Electric vehicles – further harsher financial penalties for missing emission regulations are forcing OEMs into heavy investment in new power trains and light weighting in order to reduce the vehicle emission of the new vehicles. This investment is impacting their profits and, in turn, forcing them to reduce costs and restructure. Consolidation and the benefit of economies of scale, as seen in PSA’s acquisition of Vauxhall/Opel, can provide some cost savings. Some consolidation is expected in the coming year as OEMs look for a route to generate greater market share and lower costs.
• We expect further consolidation in the downstream sector, and this will come from a number of areas. Among dealerships, we believe that dealer groups will continue to grow in size; meanwhile, used car supermarkets are set to increase their vertical integration into other areas of the market: vehicle remarketing (Cazoo acquiring Smartfleet) and car subscription (Cazoo acquiring Drover). We believe that leasing and fleet companies will also consider strengthening their position through consolidation in order to gain economies of scale through larger fleets, as well as through the provision of additional services such as the move into value added services such as Mobility as a Service.
• Among the dealers, we can see that consolidation has taken place over a number of years; the number of dealer outlets has shown a gradual decline of 6.5% over the last five years (see chart). European volume brands have lost c.14% of their franchise outlet over the last five years. Citroen has seen a reduction of 26.2% of their dealer franchise outlets over the last five years and Vauxhall has seen a decline of 20.3% over the same period.

We have reviewed the M&A market for car dealers and vehicle repair companies. As can be seen from the chart the Financial Global Recession of 2007 impacted the number of acquisitions in 2008, with a strong bounce back of acquisition activity in 2009, of which there could be the release of some pent-up demand.

Most dealerships are asset rich and can be valued in different ways. The normal approach to general retail assets is a valuation of Enterprise Value (EV) to Earnings Before Interest Tax Depreciation and Amortisation (EBITDA). With the large number of assets held by a motor retailer – including freehold property, new and used vehicles, and spare parts inventory – it is important to ensure full shareholder value is achieved. A consideration should be given for dealers to be valued as followed: Net Asset Value, plus a Goodwill Multiple of EBITDA. This takes into consideration both the asset value of the business and the profitability of the business. 

However, it should be noted that the quoted plc companies on the London Stock Exchange are not valued by the same method as they have a quoted market capitalisation and therefore adding net debt equates to EV which is then divided by EBITDA. Furthermore, many equity funds need to hold shares in certain market sectors to maintain balance in their portfolio. Motor retailers are in the General Retail sector. Index tracker funds and some portfolio fund managers will have to allocate a proportion of their fund to General Retail and, within this sector, the standard valuation process is either EV/EBITDA or Price Earnings Ratio. Recently however, Inchcape plc – a distribution company – has moved from the General Retail sector to Support Services. Therefore, in summary, non-quoted motor retail companies are valued on a net asset plus EBITDA goodwill bases.