Penske bids throw wrench into Lithia deal for Pendragon

Lithia Motors Inc.'s potentially transformative deal to acquire the dealership and fleet businesses of large U.K. company Pendragon and secure a pathway to a dealership management system has some competition — and from a rival, publicly traded auto retailer.

On Friday, Penske Automotive Group Inc. said its PAG International subsidiary, together with Sweden's Hedin Mobility Group, submitted a revised offer to buy Pendragon, upping the price from the rejected 35 cents per share to 39 cents per share.

Reuters valued the second Penske-Hedin bid at about $548 million. The bid was submitted just two days after its initial offer.

Both Penske-Hedin bids followed Lithia's announcement earlier in the week of its plan to purchase most of Pendragon for $350 million.

David Whiston, an analyst with Morningstar in Chicago, said if Pendragon accepts the new Penske bid and Lithia then offers more, he doesn't see Penske putting in multiple rounds of bids to get way higher than 39 cents per share.

"Penske seems very conservative when it comes to paying for a deal ... but you never know," Whiston wrote in an email to Automotive News. "Depends how bad they want it and how bad they don't want Lithia to have it."

Pendragon said it will consider the new proposal, consult with shareholders and provide an update "in due course." Pendragon also said Friday that it is required to hold a shareholders meeting Oct. 6 to approve or reject Lithia's proposal.

"From the Penske perspective, for me, the biggest question I have ... you've known that Lithia was after Pendragon for over a year," Whiston said. "Why did you wait to make a bid now, once Lithia got a deal done?"

Penske, in regulatory filings, said the offers are to jointly acquire the shares of Pendragon that Hedin doesn't already own. Hedin owns about a 28 percent stake in Pendragon, Reuters reported.Pendragon has 160 retail locations in the U.K. Most of them are Stratstone or Evans Halshaw-branded new-vehicle stores. Pendragon Vehicle Management is a vehicle fleet management platform with 15,000 to 20,000 cars.

"If you look at Pendragon, it's one of the U.K.'s largest retailers, and we are the largest retailer in the U.K. right now from an automotive standpoint," Penske spokesperson Anthony Pordon told Automotive News. Penske has 189 new-car dealerships outside North America, most of which are in the U.K.

"So we thought by looking at that and looking at our business, there were opportunities for us to grow in the marketplace and take advantage of any scale we have in the market."

Pordon declined to comment further following Friday's bid.

Lithia, which had said its deal could close in the fourth quarter or first quarter of 2024, declined to comment on the Penske-Hedin bids.

Lithia's pending deal differs from the Penske-Hedin offers in that Pendragon's DMS, Pinewood, is to be transformed into a standalone software company called Pinewood Technologies. Lithia would gain about a one-sixth ownership stake in that entity. Lithia and Pinewood plan to form a joint venture to bring a DMS to North America.

Whiston said there are a lot of layers to the offers and that it's difficult to compare the bids directly.

"But there's nothing stopping Penske from making a similar offer to Lithia's in terms of possibly a joint venture for the North American DMS market, too, and then taking an ownership in what will be Pinewood Technologies," Whiston said.

Both Lithia and Hedin last year made bids for Pendragon.

In August 2022, Pendragon, in a regulatory filing, said a "large international corporate" entity presented "a board-approved nonbinding offer" for the group that was later withdrawn. The bid was valued at $558.35 million at the time, according to a Reuters report.

A Sky News report then named Lithia as the unidentified bidder.

And Lithia CEO Bryan DeBoer confirmed this week that Lithia had discussions then with Pendragon, adding that his company backed away.

That proposal was contingent on receiving irrevocable commitments from each of Pendragon's five major shareholders, the U.K. retailer said in its filing then. However, Pendragon said it was unable to engage with one of the shareholders, which Sky News identified as Hedin.

And last year, Reuters reported that Hedin made a cash offer of 36 cents per share, or about $429.7 million at the time, for Pendragon.

Seaport Research Partners analyst Glenn Chin wrote in an investor note Thursday that Lithia's deal, given the ownership stake in Pinewood Technologies, implies a higher total valuation for Pendragon, at roughly $530 million.

"That said, having the Hedin group — Pendragon's largest shareholder, which effectively scuttled Lithia's acquisition bid last fall by not engaging, and then attempted to make an offer of its own only to ultimately withdraw — 'in its corner' may provide PAG an advantage in obtaining shareholder approval for any deal," Chin wrote.

In the note, Chin said he believes Penske is primarily interested in the premium luxury brands under the Stratstone umbrella, "as they are likely more profitable than the overall portfolio and would be a better strategic fit for PAG." It's unclear what Penske's intentions are for Pendragon's mainstream stores or Pinewood, he added.

Steve Young, managing director of ICDP, a European research and consultancy business in the U.K., said in an email to Automotive News that he thinks the Lithia-Pendragon deal could still go through.

"Given that the asset sale agreed with Lithia and the other institutional investors holding over 30 percent have indicated acceptance, I think the original Lithia bid and spinoff of the Pinewood business still stands a good chance of success," Young wrote.

Just days ago, Lithia appeared well-positioned to complete a deal that would add an eye-popping $4.5 billion in annual revenue, getting it significantly closer to meeting its goal of $50 billion in annual revenue by the end of 2025.

Lithia's proposed deal would double down on an international market, but what appears to be its crown jewel, Pinewood, may have the most meaning for the group long term.

DeBoer recalled that in 2015 through 2017, when Lithia was designing its 2025 plan, the auto retailer was thinking about businesses such as a captive finance company, vehicle fleet management and DMS software. Lithia refers to those businesses as horizontals.

But that period also called for entry into international markets and verticals, which Lithia describes as retail businesses structured much like automotive retail.

DeBoer said it likely would be two to three years until a Pinewood DMS arrived in North America, but he later added it would probably take three to five years to reach some scale.

These are "the final cornerstones that we needed for finalizing the [2025] plan," DeBoer said in describing the Pendragon deal.

DeBoer said Lithia, now the largest seller of new vehicles in the U.S., over time intends to transition certain U.S. stores to a Pinewood DMS. But he also acknowledged the auto retailer's relationship with industry giant CDK Global, which is its current DMS provider in the U.S.

"It does give us a pathway to DMS for Lithia, but our partnership with CDK is long and deep," DeBoer said. "I used to be on the [CDK] national advisory board. We really care about CDK. We love them. We imagine that the transition of any or some portion of our stores someday will be done in collaboration with them, if we get to that point."

Lithia said it spends about $100 million annually on its auto retail tech stack, including DMS.

CDK, in a statement to Automotive News, said it echoed DeBoer's comments that the companies had a "long and deep" relationship.

"Lithia is one of several top dealership groups in the U.S. that leverage CDK's depth and breadth of technology solutions to operate their business," the company said in the statement. "We don't expect any changes to our relationship any time soon, and long term, CDK's open and integrated platform approach empowers our customers with the ability to use the tools that best fit their business needs while enabling seamless workflow integrations with CDK products."

DeBoer said the Pendragon deal would fill almost half of the remaining network development, or acquisition, piece of the 2025 plan, which Lithia raised this year to $25 billion from $20 billion. If the deal closes, Lithia estimates its annualized revenue to be more than $38 billion.

The Pendragon deal is a fairly low-cost entry, DeBoer said, relative to revenue.

"The revenue that we're getting from the auto stores is almost a bonus," he said. "We were really excited to do the first two components, the [Pendragon Vehicle Management] and the software company, which was our major focus."

Gail Kachadourian Howe, Mark Hollmer and Reuters contributed to this report.