A strong new and used car market has prompted Lookers (LOOK) to exploit its strong balance sheet to acquire Addison Motors for £87.5m in cash. The purchase is being funded by new lending facilities, with a string of banks offering a £150m term loan and a £100m revolving credit facility running until 2020. Addison, which trades as Benfield Motor Group, is expected to boost Lookers' annualised sales by around 20 per cent and give an immediate lift to earnings. The latest accounts from Addison for the year ending December 2014 reported turnover of £700m and pre-tax profit of £7m.
The acquisition will boost Lookers' presence in the North East of England in particular. Benfield, based in Newcastle, is one of the UK's largest private motor retailers, with 30 dealerships in the North of England and Scotland and franchises including Audi, VW, Ford, Toyota and Nissan. Its principle services range across sales, check-ups, parts and body-shop facilities on new and used cars as well as commercial vehicles.
Before the acquisition, Lookers reported a drop in net debt at the June half year of £14m over the six months to £38.2m - less than half cash profit and just 13 per cent of net assets.
Numis Securities says...
Buy. The latest acquisition dovetails nicely in terms of locations, and we expect Lookers to raise the level of profitability significantly, ensuring a strong return on capital employed. The acquisition price represents a historic PE multiple of about 16, but this is before any asset sales or synergies. The pre-tax margin of 1 per cent is lower than the 2 per cent at Lookers, but scale benefits and operating efficiencies are expected to ensure that the acquisition comfortably clears the company's return on capital employed hurdle rate of 15 per cent. Accordingly, we have raised our pre-tax forecast for the year to December 2015 by 12.5 per cent to £71.9m, giving EPS of 14.2p.
Peel Hunt says...
Buy. Following the acquisition, we have upgraded our full-year forecast for 2015 to adjusted pre-tax profit of £71.5m and EPS of 14.6p. The purchase is timely, coming just before the peak September period for sales. It is also of note that Nigel McMinn, the managing director of Lookers' motor division, had previously been chief executive of Benfield Motor Group, giving Lookers a great understanding of the target's business. Digesting an acquisition of this size will take time, but net debt is likely to decline quickly - we think it will be about 80 per cent of cash profit by the end of 2016. We have long viewed Lookers' shares as being undervalued.
