Column: Chasing the Pendragon sets off a chain reaction in automotive retail

Lithia Motors Inc.'s announced acquisition-and-partnership deal with Pendragon, one of the U.K.'s largest dealership groups — and a competing Penske Automotive Group Inc. bid — reflect how auto retail is evolving, at least for some of the biggest players.

If Lithia's plan goes through, it's a huge step in its growth journey — expanding the business and opening new opportunities beyond selling and servicing cars and light trucks.

First impression: Picking up $4.5 billion in revenue for an investment of $350 million sounds like a steal, which might be why Penske would be interested in a deal.

Let me try to put this situation in context.

Bryan DeBoer's first five-year plan aimed to roughly quadruple revenue to $50 billion by 2025, which clearly meant Lithia would become the biggest auto retail group in the U.S. It would do so mostly with acquisitions, but also through organic growth, building up a captive finance company and developing a digital platform for nationwide retail. The focus was primarily domestic, but Lithia has also entered Canada and the U.K. in recent years.

DeBoer clearly sees opportunities in other markets — all kinds of other markets. As he explained to me, Automotive News reporter Jack Walsworth and senior editor Melissa Burden this summer: The next growth plan will be about expanding horizontally and vertically.

Horizontal growth involves expanding offerings related to auto retail — consumer insurance, fleet management, charging networks, dealership IT services. Vertical growth opportunities are those with operations that resemble auto retail, such as selling recreational vehicles, powersport vehicles, heavy trucks and agricultural vehicles.

So the Pendragon deal would give Lithia a head start on that second stage by adding significant fleet management operations, investing in a U.K. software-as-a-service company — and planning a North America joint venture with it.

In that sense, if DeBoer's first five-year plan for Lithia was about out-AutoNationing AutoNation, which had long been the biggest U.S. dealership group, the second might be about out-Penskeing Penske, which has arguably been the most diversified.

Penske Automotive, like its legendary namesake, is not limited to one field of excellence. Former auto racer Roger Penske is an American auto dealer, motorsports team owner and owner of the Indianapolis Motor Speedway, among other things.

The group that CEO Penske runs at age 86 has U.S. dealerships, but it also has franchises in the U.K., Germany, Italy, Spain and Japan. It has a commercial truck business in North America and a commercial vehicle, power systems and parts distribution business in Australia and New Zealand. Pendragon's fleet management and retail operations could tuck nicely into Penske's existing operations.

Penske's bidding has been in partnership with Hedin Mobility Group, a large shareholder in Pendragon, which apparently had blocked Lithia's attempt to buy Pendragon last year in favor of its own effort.

The other big shareholders seem to prefer Lithia's vision, and the management, led by Bill Berman, former COO of AutoNation, might like DeBoer's plans for them to all have roles with Jardine, Pendragon Vehicle Management or Pinewood Technologies.

Still, the prospect of a competing bid may also force Lithia to pay a higher price.

Pendragon's board rejected the initial Penske-Hedin bid — but it also gave them until Oct. 18 to present a solid bid. The duo submitted a higher nonbinding offer for the shares not held by Hedin on Friday, Sept. 22, and the board is set to evaluate Lithia's offer Oct. 6. So this isn't a done deal.

As for the 160 auto retail outlets in the U.K.? DeBoer said he sees it as "almost a bonus" — a pleasant surprise tacked on with the other two moves.

Nice bonus. Combined with Jardine, the Audi-heavy London group Lithia acquired earlier this year, Pendragon would give Lithia a 3.6 percent share of the new-vehicle market — two and a half times what it has in the U.S. He'd like to have some Toyota and Volkswagen stores to round out the portfolio, but the U.K. footprint will be just about set.

Aside from the drama of America's No. 1 and No. 3 dealership groups bidding against each other, there's a whole other drama on the software side.

CDK Global's dealership management systems run throughout Lithia's operations, helping the company standardize the data it uses to measure performance. Lithia's plan to form a joint venture to offer a competing DMS (one that happens to be cloud-based, like Tekion's) seems like a big threat to CDK — both as a new potential rival and one that might take its biggest customer.

DeBoer has nothing but good things to say about CDK, but the risk it faces is real.

It will be interesting to see how other U.S. and Canadian dealers view the North America version of Pinewood's DMS when it reaches the market in a few years. Will it be shunned, like those who avoid ADESA auctions now that they're owned by Carvana, or might it be embraced like Tesla's Superchargers?

However it all turns out, it's clear that for at least some dealers, the business is getting more complicated as well as more global.