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Auto group merger tipped to proceed despite AHG caution

Glenn Freeman with AAP  |  24 Apr 2019Text size  Decrease  Increase  |  
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The proposed merger of automotive rivals Automotive Holdings Group and AP Eagers would help offset short-term sector weakness by expanding AHG's footprint and car brand coverage, says Morningstar.

Automotive Holdings Group has urged shareholders to sit tight on a takeover offer from rival vehicle retailer AP Eagers - Australia's oldest listed automotive retailer - warning they may be disadvantaged if they agree to sell before the "highly conditional" deal is approved.

AHG, which has appointed KPMG to prepare an independent expert's report for its target's statement, advised shareholders not to respond to Tuesday's bidder's statement until the board had made a recommendation.

"There is no benefit to you in accepting the offer or to take any other action at this time and you may be disadvantaged if you do," AHG acting chairman John Groppoli said.

"The offer is highly conditional and AHG expects that there will still be a significant period of time for you to determine a course of action following receipt of the target's statement."

Morningstar equity analyst Daniel Ragonese is confident the merger will proceed, with the proposed deal seeing AHG shareholders receive one AP Eagers share for every 3.8 AHG shares.

The deal implies a fair value estimate of $2.30 a share for AHG - a modest 11 per cent discount to Morningstar's standalone $2.60 fair value estimate.

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AP Eagers, currently AHG's largest shareholder, earlier reconfirmed its 5 April offer of one share for every 3.8 AHG shares.

AHG's share price climbed more than 30 per cent on news of the approach last week, from $1.79 to $2.08, and opened trade today at $2.40 a share.

In addition to the deal's takeover premium, other advantages for AHG shareholders include:

  • Expanded coverage area
  • Brand diversity
  • Scale benefits
  • Stronger balance sheet
  • Cost advantages.

If the merger proceeds, Ragonese says the combined entity would hold a commanding 12 per cent share of the Australian automotive retailing market.

The combined entity will also 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 added scale will not only deliver the target $13.5 million in annual cost savings, but also fortify the firm’s competitive position," Ragonese says.

These cost efficiencies would help offset flagging new vehicle sales across the broader automotive sector. New car sales are tipped to remain soft for at least the next 12 months, largely due to the negative wealth effect driven falling house prices in Australian capital cities

If successful, the merged entity would hold 229 new car dealerships in Australia, 13 in New Zealand and almost 70 truck and bus dealerships nationally.

It would represent 33 automotive brands, including from the top 26 manufacturers that comprised 95 per cent of all vehicle sales during 2018.

The deal should clear its next hurdle by 8 May, with the AHG board due to release its target's statement on or before this date.


. Glenn Freeman is senior editor, Morningstar Australia.

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