Some shareholders of Automotive Holdings Group (ASX: AHG) have been confused in recent times, with the stock seemingly disappearing and no longer being quoted on the ASX. The reason for this is the acquisition of the company by AP Eagers, at a premium to their market price. The transaction recently gained ACCC approval, with the regulator saying that AHG can merge with AP Eagers providing the latter divests Newcastle and Hunter Valley car dealerships. The regulator believes that there will not be concerns over competition in the new car market after the deal, either in the sub-markets for individual cities or nationally. It is important to analyse competition on both levels; while a local monopoly is much easier for consumers to avoid than a national one and thus presents less anti-competitive pressures, adequate local competition is still beneficial to consumers.
Automotive Holdings Group Car Dealerships (Credit: Automotive Holdings Group)
If a company successfully acquires more than 90% of the shares in another company, they can compulsorily acquire the remaining 10% under the terms of their offer. This is exactly what happened in the case of AHG, which is why they can take the company private.
Automotive Holdings Group swung to a full-year loss this year, as new car sales slumped for the 15th month in a row and the industry environment remains challenging. The company still had a positive operating NPAT of $58.7m for continuing operations, which is not too unreasonable for a cyclically challenged business worth $1.06bn. The main issue with the results, however, is the company declaring a statutory loss of $232.6m after tax which, in light of the company’s size, will make a significant dent on the group’s balance sheet. Within the automotive retail market, the company blamed the banking Royal Commission, wealth effects from the housing market decline and general economic uncertainty for the lacklustre sales environment.
The company traded on a dividend yield of 3.2% and was projected to be on a forward FY21 PE multiple of 18. Bulls would argue that these multiples present an attractive opportunity for an acquirer to buy a quality company that will have market power through its position as the largest Australian car dealership business, which is temporarily weak on the back of cyclical factors. The deal is structured as AP Eagers taking AHG over and gained full board approval. This follows their successful negotiation for the withdrawal of previous conditions that their offer was subject to. As such, investors would do well to analyse the combined group and reassess their investment views once the deal goes through, instead of focussing on the multiples for AHG in isolation.
This article has been prepared by the Australian Stock Report Pty Ltd (AFSL: 301 682. ABN: 94 106 863 978)
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