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Morningstar | Automotive Holdings Likely to Be Taken Over by AP Eagers, FVE Adjusted to Implied Offer Price

We are becoming increasingly confident in the likelihood of a merger between AP Eagers and Automotive Holdings. The implied takeover premium for Automotive Holdings shareholders has increased to over 30%, compared with 8% premium on the AUD 1.78 per share closing price on the day prior to the announcement of the merger. The deal would see Automotive shareholders receive one AP Eagers share for every 3.8 Automotive shares. Our AUD 9.00 per share AP Eagers fair value estimate implies a value of AUD 2.30 per Automotive share. While this represents a modest 11% discount to our standalone AUD 2.60 per share fair value estimate, the premium should be enough to secure the deal. We have adjusted our fair value estimate to the implied offer price, and the shares are currently fairly valued. In addition to the takeover premium, the merger carries several benefits for Automotive shareholders, most noteworthy being: the added geographic and brand diversity, scale benefits, access to a stronger balance sheet, and cost synergies.

We are positive on the outlook for the combined entity. Collectively the automotive giant will command around 12% of the Australian vehicle market. The added scale will not only deliver the target AUD 13.5 million in annual cost savings, but also fortify the firm’s competitive position. Upon completion of the merger, the combined entity will operate a much more geographically diverse business, as AP Eagers’ operations are skewed to Queensland, Melbourne, and Sydney, whereas Automotive Holdings is heavily exposed to Western Australia. The near-term outlook for new vehicle sales remains challenging, although we forecast this to improve over the long term. The declining residential property market, and consequential negative wealth effect which has weighed on new vehicle sales will remain a headwind for at least the next 12 months.

The combined entity will also increase the level of brand portfolio diversifications, with an anticipated 229 new car dealerships in Australia, 13 in New Zealand, and almost 70 new truck and bus dealerships in Australia. The merged group will represent 33 car brands, including the top 26 leading car brands during calendar 2018 which represented 95% of new vehicle sales during this period. As the largest dealer, the company will benefit from greater working-capital efficiency, by allocating inventory across stores to more effectively meet customer demand than a smaller dealer can. This will provide AP Eagers more flexibility in adjusting the brand mix based on customer preferences and geographical/demographic differences.