Automotive News Canada - February 2022 - 14

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EXPERT INSIGHTS
DEALERSHIP MERGERS & ACQUISITIONS
Dealerships traded hands at a record level
in 2021 and also commanded all-timehigh
prices. Is this trend primed to carry
over into 2022? Will certain brands generate
higher valuations than others? And will
more United States-based mega-groups
enter the Canadian market? Read on as
industry experts from BDO, Templeton
Marsh and DSMA answer these and other
questions and provide valuable insights
and perspectives.
Q: Looking ahead, what franchise
brands do you see earning higher
valuations?
Left - right: Farid Ahmad, Cameron Percy, Samir Akhavan
Q: 2021 was a big year for buy-sell deals, and dealership multiples have
grown as a result of higher profi ts. Where are dealership valuations
headed in 2022?
Cameron Percy, BDO: Heightened multiples in the industry are primarily driven
by availability and low cost of debt capital, willingness of banks to fi nance goodwill
in transactions and a shrinking pool of targets that
fi t properly into each buyer's strategy. Furthermore,
signifi cant profi ts and material increases in real-estate
values have left buyers with signifi cant amounts
of equity capital to deploy. Underlying all of that, of
course, is the business case for consolidation in the
industry (i.e. scaling fi xed costs, purchasing power,
consumer brand recognition, etc.). Notwithstanding
interest-rate increases from the Bank of Canada, I
don't see these forces shifting materially in 2022,
so I think valuations will continue where we've seen
them during the past year.
"
Ahmad: We're seeing good multiple
increases in the Chrysler, Subaru, and
Toyota brands The luxury brands, in particular
Mercedes-Benz, also are delivering
very high multiples.
During the next couple of years, we
believe the Korean brands will see a
very positive jump. And Ford's product lineup and EV strategy position its
dealerships to remain very popular acquisition targets for the foreseeable
future.
What's interesting is
that underperforming
"
Akhavan: Brands with attractive EV lineups, specifi cally Asian brands, are
gaining a competitive advantage in today's market. In the 44 years I've been
in this business, retail auto has been somewhat predictable. But now we're
seeing a rapidly changing tech landscape and new
distribution models. Amid all of this, I believe the
brands that continue to treat their dealers as partners
will prosper.
dealerships with strong
brands in large markets
are seeing very high
multiples.
Samir Akhavan, Templeton Marsh: We believe
valuations will remain strong and stable during the
next two or three years. Dealers now are familiar
with the ongoing pandemic environment in automotive retail and it has become
the new normal. As a group, dealers are optimistic and expect the inventory
issues they've faced during the last 18 months, related to microchip shortages,
will improve in 2022. As a result of both record profi ts and the stabilization of
inventory, buyers are aggressively looking to deploy their capital into growth.
We should never lose sight of the fact that good assets always will command a
premium, regardless of the impact from both macro
and micro economic events. The one unknown
factor is global political dynamics; there's potential
for serious confl ict in Eastern Europe, China,
Taiwan and the Middle East. In our view, any confl
icts could signifi cantly impact market valuations.
"
Farid Ahmad, DSMA: Overall, multiples remain
steady. However, with increased profi tability and
land values, we are seeing much higher walk-away
checks. What's interesting is that underperforming
dealerships with strong brands in large markets are
seeing very high multiples.
As for where multiple-values are headed, the
answer depends on a few issues, such as interest
rates, inventory-supply issues, the used-car market
and, of course, COVID-19. If no major economic
changes occur and the supply-chain issues get
resolved soon, you could see an increase in multiples, due to pent-up demand
for dealerships. But if the economy takes a nosedive, then all bets are off.
- Farid Ahmad, DSMA
Percy: Canada is a large, diverse country and the
brands and types of vehicles that do well vary by
region. As an example, consumer interest in electric
vehicles (EVs) has experienced a step-change
increase during the past few years, so franchises
that can roll out a strong portfolio of EVs in the near
term could translate into attractive valuations for
associated dealers.
But in the near term, I expect actual acceptance of
EVs will be limited to only certain geographies with
conducive cultures, lifestyles and EV infrastructure. To that end, I anticipate
that brands with a demonstrated clear future path for their product lineups will
fare well, as will their associated dealerships.
Q: Over the last few years, we've seen continued consolidation of Canadian
dealerships. With profi ts up, do you expect consolidation to continue or
slow down?
When it comes to
evaluating an M&A
target, I think brand and
geography will dominate,
along with how well it
fi ts into the buyer's
growth strategy.
"
-Cameron Percy, BDO
contentstudio
Akhavan: Consolidation of Canadian dealerships
will continue. Some dealers in the market still lack
succession plans and with the recent inventory
challenges and stresses from the pandemic, many
dealers have decided that now is the right time
to sell. The automotive industry still provides an
attractive return on investment and buyers' ability
to scale operations through consolidation is still a
trend in the Canadian market.
Another factor to consider is the cost of capital
and how that becomes part of the cost of doing
business. With cheap fi nancing available to dealer
groups (some readers will remember the days when
retail paper was 25 percent), as well as signifi cant
advances in operational technology, dealers can consolidate
more easily. We believe that in the next fi ve
years, there'll be at least three or four national dealer
groups. We also believe that regional dealer groups will grow, as will provincial
groups. And there will always be single-point stores in small, rural markets.
Automotive News Canada - February 2022

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