Acquisition from Lex Service Plc
Pendragon PLC
8 March 2000
Pendragon PLC
Proposed acquisition of dealerships and bodycentres
from Lex Service PLC
Pendragon PLC ('Pendragon'), one of the UK's largest car dealership groups,
today announces that it has reached agreement with Lex Service PLC ('Lex') to
acquire 32 of Lex's car dealerships and 4 of Lex's car repair shops trading as
Lex bodycentres ('the Acquisition'). The initial cash payment will be £78
million subject to adjustment based on the value of Lex's net assets as at 31
March 2000. The Acquisition is conditional upon approval by Pendragon's
shareholders at an extraordinary general meeting to be held on 27 March 2000.
The Acquisition fits Pendragon's strategy of developing strong positions in
its specialist and volume ('market area') operations, bringing together two
complementary dealership portfolios. Specifically, the Acquisition provides
Pendragon with:
* Increased scale with manufacturers in its key specialist franchise
areas, leading to greater efficiencies
* Complementary dealerships in the Midlands and South East of England, and
an increased presence in the North West of England
* Cost savings relating to a reduction in combined overhead costs
* A larger group over which to spread information technology costs
* Reduced combined working capital requirements due to economies of scale
and improved working practices from more brand-focused management
Trevor Finn, chief executive of Pendragon, commented:
'The Lex businesses represent an excellent strategic fit with Pendragon,
further consolidating our position as one of the UK's largest car dealership
groups. Lex's marques will be absorbed within our brand-focused structure
enabling us to obtain economies of scale and improved efficiencies, adding
value for our customers, manufacturers, and shareholders.'
There will be a presentation to analysts and fund managers at Finsbury, 52-58
Tabernacle Street, London EC2A 4NJ at 9.30am today. A circular is expected to
be sent to shareholders today.
This summary should be read in conjunction with the full text of the following
announcement.
Enquiries:
Trevor Finn, Chief Executive Pendragon PLC 01623 725 000
David Forsyth, Finance Director
Peter Smart Schroders 020 7658 6000
Mark Todd
Charlotte Festing Finsbury 020 7251 3801
Patrick Diamond
Introduction
It was announced today that the Pendragon Group has agreed to acquire 32
franchised motor dealerships and 4 bodycentres from Lex. The consideration
payable will be calculated by reference to the net asset position of the Lex
Businesses at completion, which is expected to take place on 31 March 2000.
Based on the net assets of the Lex Businesses at 31 December 1999, the
consideration would be £78.55 million. The total maximum consideration
payable is £94.85 million. In view of its size, the Acquisition is
conditional on Shareholder approval which is to be sought at the Extraordinary
General Meeting to be held on 27 March 2000.
The purpose of this document is to provide you with details of the
Acquisition, to explain why the Directors believe that it is in the interests
of Pendragon and to recommend that you vote in favour of it. A notice
convening the Extraordinary General Meeting at which a resolution to approve
the Acquisition will be proposed is set out at the end of this document.
Information on Pendragon
Pendragon is one of the UK's largest motor retailers operating 196 franchises
from 150 dealership locations. The main volume franchises operated by
Pendragon are Fiat, Ford, Peugeot, Vauxhall and Rover, along with specialised
boutique franchises for Aston Martin, BMW, Ferrari, Jaguar, Land Rover,
Mercedes-Benz, Porsche and Volvo.
In addition, Pendragon operates a contract hire business, which leases cars to
corporate customers, with a fleet of approximately 10,000 vehicles.
Preliminary results for the year ended 31 December 1999
For the year ended 31 December 1999 Pendragon's audited consolidated turnover
amounted to approximately £1,754.2 million (1998: £1,272.0 million) and
audited consolidated profit on ordinary activities before taxation amounted to
approximately £19.2 million (1998: £18.7 million). Consolidated shareholders'
funds as at 31 December 1999 amounted to approximately £142.5 million
(1998: £132.0 million).
Information on the Lex Businesses
The Lex Businesses comprise 32 car dealerships - 7 Jaguar, 7 Volvo, 5 Land
Rover, 3 Rover, 2 Mercedes-Benz, 2 Volkswagen, 2 Audi, 1 Chrysler Jeep, 1
Porsche and 2 Rolls-Royce and Bentley - together with four repair shops
trading as Lex bodycentres. For the year ended 31 December 1999 the Lex
Businesses had sales of £381.1 million (1998: £376.9 million) and operating
profit before vehicle stock financing of £7.3 million (1998: £7.5 million).
As at 31 December 1999 the Lex Businesses had net operating assets of £73.1
million (1998: £83.8 million).
Principal terms of the Acquisition
The Pendragon group proposes to acquire the Lex Businesses for a total
consideration, calculated by reference to the net asset position of the Lex
Businesses at completion. The net assets will be calculated by reference to a
completion net assets statement to be drawn up as at 31 March 2000. The
maximum consideration payable is £94.85 million. On completion an initial
cash payment of £78.0 million will be made. On 30 June 2000, if it is not
disputed that the consideration will exceed £78.0 million, the amount of the
excess, up to a maximum of £14.0 million, will be paid. On the net assets
being agreed or, if later, 2 January 2001, the balance of the consideration,
if any, will be paid.
The assets being acquired include the properties from which the Lex Businesses
operate together with stocks of new and used motor vehicles, trade and other
debts, plant and equipment and other stocks but do not include cash at bank or
the principal computer system operated by the Lex Businesses. Lex has agreed
to allow Pendragon to use its computer system for a period of up to three
months to allow Pendragon to introduce its own system after completion.
Pendragon has agreed to assume all the creditors and other liabilities of the
Lex Businesses other than liabilities for bank borrowings and tax and certain
other specified liabilities.
The Acquisition is conditional on Shareholder approval at the Extraordinary
General Meeting.
Background to and reasons for the Acquisition
Following the acquisition of Lex's volume dealerships in September 1997,
Pendragon developed a brand-focused operating structure with two main areas -
specialist or 'boutique' brands, and volume brands which it operates under a
distinctive 'market area' structure. Pendragon believes that this operating
structure offers significant advantage to the manufacturer as it provides a
focused approach to the market and allows clearer lines of communication. As
the scale of the relationships with individual manufacturers increases,
efficiencies and economies are gained that are not as easily available within
a multi-franchise structure. Pendragon believes this structure has been
instrumental to growth with manufacturers in an environment that is
increasingly orientated towards partnerships of this nature.
Pendragon acquired Evans Halshaw Holdings plc in February 1999. As a result
of this brand-focused structure and leadership, Pendragon has been able to
quickly absorb the Evans Halshaw dealerships.
While Pendragon is currently operating in a depressed market, as one of the
UK's leading car retailers, it is ideally positioned to benefit once the
market recovers. The Acquisition provides Pendragon with a quality business
whose long-term prospects promise healthy returns. Not only will the Lex
Businesses expand and strengthen Pendragon's relationships with its existing
manufacturers, but they will also provide Pendragon with enhanced geographical
spread and greater economies of scale. The Lex Businesses will be
incorporated into Pendragon's existing operational structure, with the
dealerships becoming part of the appropriate brand-focused group. Marques
that are not currently represented by Pendragon will be incorporated into
Pendragon's business development group.
Benefits of the Acquisition
Operational and strategic benefits
The Pendragon portfolio and the Lex Businesses are complementary both
geographically and in terms of brands sold. Pendragon therefore believes that
the Acquisition represents a major step forward in implementing its chosen
strategy for developing market areas and enhancing its portfolio of boutique
dealerships. Pendragon expects benefits to accrue in the following areas:
* Brand fit: Lex's dealerships are a good brand fit with those of
Pendragon providing increased scale with manufacturers in
franchise-focused groups and leading to greater efficiencies.
* Complementary geographical locations: the Lex Businesses offer Pendragon
a new franchise in the North West of England, where Pendragon currently
has relatively little presence, and strengthened positions in the
Midlands and South East, where the Lex Businesses are generally located
in different areas to the existing Pendragon businesses.
* Increased scale: the Acquisition will result in a larger group over
which to spread information technology development and implementation
costs.
* Reduced costs: the Enlarged Group will deliver a reduction in combined
overhead costs resulting in ongoing cost savings for Pendragon.
* Working capital reductions: the Acquisition will lead to reduced
combined working capital requirements both as a result of economies of
scale and the more effective management of working capital by
franchise-focused leadership teams.
Financial benefits
The Directors believe that the Acquisition will deliver cost savings in
respect of duplicated operating costs and will be earnings enhancing in the
first full year (although this should not be interpreted to mean that the
earnings per share of the Enlarged Pendragon Group will necessarily be greater
than the historical published earnings per share of Pendragon).
The Acquisition will be funded by new banking facilities entered into by
Pendragon.
Current trading and prospects
Pendragon
The following is an extract from Pendragon's preliminary statement of results
for the year ended 31 December 1999 which were announced on 25 February 2000:
'The current confusion surrounding pricing which is causing some customers to
hold off buying cars will continue to impact profitability until resolved.
Publication of the Competition Commission report currently being scrutinised
by the Secretary of State for Trade and Industry should bring a degree of
certainty back to the sector. Our other profit streams, principally
aftersales and used cars, remain unaffected.'
Overall, the trading of Pendragon since 31 December 1999 has been
satisfactory.
The Lex Businesses
The trading of the Lex Businesses since 31 December 1999 has been
satisfactory.
Notwithstanding the current uncertain environment, the Directors are
optimistic regarding the prospects of the Enlarged Pendragon Group.
Extraordinary General Meeting
An Extraordinary General Meeting of the Company is to be held at Loxley House,
2 Oakwood Court, Little Oak Drive, Annesley, Nottingham NG15 0DR at 11.00 a.m.
on Monday, 27 March 2000, at which a resolution will be proposed to approve
the Acquisition.
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