Automotive News Canada - February 2022 - 15

Ahmad: Profi ts during the past two years have increased signifi cantly for most
new-car dealers. However, buyers we're working with today are very sensitive
to overpaying for a dealership, especially because of the short-term impact
COVID has had on dealership profi ts. However, we do expect that consolidation
will continue at the current fast pace.
As an interesting sidenote, one dealer group we're working with told us that a
six-rooftop group now is the " new " single-rooftop dealership. In other words,
groups smaller than that will fi nd it diffi cult to compete with the consolidators.
Percy: In my view, many dealerships experienced unsustainable profi tability
levels during 2020 and 2021. I think a few things will reduce dealership profitability
to more normalized levels, not the least of which is the removal of
government subsidies. Furthermore, signifi cant
backlogs and delays in inventory shipments will
reduce sales volume and profi ts across the industry.
This last point will likely prolong the improved
gross margins that many dealers generated last
year, but whether it will fully offset reduced sales
volume is questionable.
That said, I don't view heightened profi tability
or margins as the lynchpin of a buyer's interest
in a particular acquisition target. 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. I think the
industry still possesses the essential ingredients
of strong M&A activity: willing sellers, growth-focused
buyers and suffi cient capital. If anything,
the forces driving deal activity have only strengthened
during the past few years.
Q: One of the more notable deals last year was U.S.-based Lithia Motor's
acquisition of Pfaff Automotive Partners. Lithia has said Canada is it's
" number-one target. " Should we expect to see more American publics
and mega-groups making deals in Canada?
Ahmad: We've already been working with several large groups from the United
States that are looking at the Canadian market. They have the cash and the motivation
and they're really focusing on our four key markets: Vancouver, Toronto,
Montreal and Calgary. During the next few years, we strongly believe that we'll see
at least one additional U.S. mega-group, or maybe two, enter the Canadian market.
Percy: As the door for these types of transactions continues to open, I think
we'll see more buyers looking across the border for acquisitions. An expanding
presence of U.S.-based, publicly traded dealer groups in Canada is likely to
increase competition and other pressures facing dealers today, especially for
single-point stores and small to mid-sized groups. However, it also opens up
a new long-term succession option for Canadian dealership owners. This is
especially interesting for groups that have grown so large that there are limited
potential buyers in Canada.
Akhavan: When we fi rst introduced Lithia's Sid DeBoer to Canada (and Canada
to Lithia) at our Toronto Symposium in autumn of 2014, we had no doubt there
would be northward movement by American groups. But it has taken longer
than initially expected. We believe Lithia will continue to expand in Canada,
just as it does in the United States, which is a matter of public record. Lithia's
"
Lithia's acquisition
of Pfaff was a catalyst
for some of the larger
Canadian operators to look
at signifi cant acquisitions
for themselves to ensure
they're not left behind.
"
- Samir Akhavan, Templeton Marsh
acquisition of Pfaff was a catalyst for some of the larger Canadian operators to
look at signifi cant acquisitions for themselves to ensure they're not left behind.
In fact, we anticipate some " blockbuster " announcements shortly.
Nevertheless, it is possible that more U.S. publics and mega-groups will look at
future expansion in Canada. These groups bring substantial capital for growth,
which in the past has been limited in the Canadian market. We currently are in the
middle of a number of transactions where dealer groups are acquiring other dealer
groups. And we see this trend continuing.
Q: What's one key M&A trend you're watching in 2022?
Percy: One of the big themes I've noticed amongst operators during the past
couple years is right-sizing. It's born out of signifi cant increases in real-estate
costs (both real and notional), other pressures on
profi t margins and changes in the way consumers
interact with dealerships.
The solution takes different forms, depending on the
brand, geography and other factors. But at the core, it
focuses on right-sizing of facilities, staff and other infrastructure
to better align with the business' long-term
strategy. This will have implications for how deals are
assessed, valued and structured - and for fi nding the
right buyer.
Ahmad: While we're closely watching the trend
toward consolidation of small to mid-size dealer
groups, we're also monitoring another trend
worth mentioning: the lack of dealerships for sale.
Acquisition targets have been limited as dealers continue
to remain highly profi table in a low-inventory
environment. At some point, many dealership valuations may peak in light of future
uncertainty about the agency sales model, EVs and an end to a high gross environment
tied to low vehicle supply.
Akhavan: I'll be interested to watch the consolidation trend and see how many
large buy/sells occur among small to mid-sized dealer groups. Large dealer
groups are going to become even larger as they acquire more dealer groups.
Consolidation has always been the biggest piece of the auto-retailing M&A
puzzle. However, it would be wise to carefully monitor other developing trends,
such as the sustainability of high gross profi ts and increasing real-estate costs.
ABOUT THE PANELISTS
SAMIR AKHAVAN
Co-founder and managing partner, Templeton Marsh
Samir's 45 years of automotive industry experience began buying and selling cars on
York University's campus. In the early '80s, he formed one of Canada's fi rst dealer
groups. Mentored by icons of Canada's retail auto industry - Noel Croxon, Roy Foss
and Harold Hadley - Samir became dealer principal of 9 stores in 7 locations. He now
leads Templeton Marsh as its managing partner, where his experience affords him intimate
familiarity with the inner operations of a dealership. Samir and his team leverage
over 350 combined years of hands-on automotive experience to execute their clients'
acquisition and/or divestiture strategies.Templeton Marsh serves as M&A advisor to
Canada's largest dealer groups. templetonmarsh.com
CAMERON PERCY, CFA
Managing Director & Partner, BDO Canada M&A and Capital Markets
Cameron advises business owners across Canada on divestitures, acquisitions, raising
capital, and developing M&A strategies. He is a Partner at BDO, a leading global provider
of professional services, delivering a range of assurance & accounting, tax, and
advisory services. bdo.ca/en-ca
FARID AHMAD
Founder and CEO, DSMA
With over 35 years of global auto industry experience, Farid is considered a genuine
industry expert by Dealers & OEMs alike, with his fi nger on the pulse of the automotive
marketplace across North America. Farid is CEO of DSMA, an automotive intelligence
and M&A advisory service that has completed over 1,200 valuations and 300 transactions.
dsma.com
contentstudio
http://www.templetonmarsh.com http://www.bdo.ca/en-ca http://www.dsma.com
Automotive News Canada - February 2022

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