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Rival car retailers AP Eagers and AHG poised to merge

Lex Hall with AAP  |  05 Apr 2019Text size  Decrease  Increase  |  
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Vehicle retailer AP Eagers says it wants to take the wheel of rival Automotive Holdings Group and create a $2.42 billion company capable of handling the transition to electric and automated vehicles.

AP Eagers (ASX: APE), currently AHG's largest shareholder with 29 per cent, said on Friday it had offered one share for every 3.8 AHG (ASX: AHG) shares.

The offer is worth $1.92 per share, representing a premium of 7.63 per cent to AHG's based on Thursday's closing prices.

AHG has advised its shareholders to take no action until it digests APE's bidder's statement and makes a recommendation in due course.

Shares in AHG were trading 15.7 per cent higher at $2.06 at 1.45pm Sydney time, still more than 40 per cent lower than a year ago.

AP Eagers' shares were 5.63 per cent higher at $7.69 at the same time, having climbed 37 per cent from December's four-year low of $5.70.

AP Eagers chief executive Martin Ward said the proposed deal would bring together two complementary businesses to better weather new electric and automated vehicle markets, declining new car sales in Australia and increased regulation around financing.

"The key message today is we believe we'll be stronger together," Ward told AAP.

Ward acknowledged APE's franchise structure was aligned with fortunes of manufacturers, who have been hit by falling vehicle sales and the prospect of integrating new products such as electric and automated vehicles.

But he said a merger now would ride a wave of industry cost-cutting.

"Up until three years ago none of our manufacturers were looking at taking costs out," Ward said.

"Now we're seeing manufacturers not only willing to let retailers take costs out, but are aggressively looking for them to do so".

Shares in AHG have slipped more than 50 per cent from their historic high of $4.82 in August 2016, bottoming out at a near decade-low of $1.22 in January after flagging a $223 million writedown against its struggling franchised and refrigerated logistics businesses.

Acting AHG chair John Groppoli said on Friday the board strongly believed in the company's underlying growth prospects, and he advised shareholders to take no action on APE's offer.

Morningstar equity analyst Daniel Ragonese described the AP Eagers bid is “opportunistic” in light of the plunge in AHG’s share price.

The implied offer price is considerably lower than Ragonese’s $2.60 fair value estimate for AHG.

“In saying that, there a lot of obvious benefits for both companies in this potential merger,” Ragonese says.

“Namely, the increased diversity, both referring to the brands that they’re selling and the regions they’re operating out of, the added scale, and likely cost synergies.”

Echoing Ward’s thoughts, Ragonese says the merged entity will be in a stronger financial position and better placed to deal with the cyclical and structural challenges in the car dealership sector such as poor sales and a regulator crackdown on car loans.

“These challenges include weak new vehicle sales, which have struggled in the past year, but also regulatory reform — ASIC restricting the commission dealers can earn on car-financing products.

“Both of these factors have really weighed on AHG’s share price over the past.”

. Lex Hall is content editor with Morningstar Australia

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