Deal would give Lithia a large presence in U.K. and a pathway to a DMS

Lithia Motors Inc.'s latest deal will do more than just add an eye-popping $4.5 billion in annual revenue with the group's purchase of the dealership and fleet businesses of Pendragon, among the largest auto retailers in the United Kingdom.

If completed, the transaction would get Lithia significantly closer to meeting its goal of $50 billion in annual revenue by the end of 2025 as it doubles down on an international market and diversifies its businesses with a sizable vehicle fleet management platform.

But Pendragon's dealership management system, Pinewood, appears to be the deal's crown jewel, and it may have the most meaning for Lithia long term.

The DMS is to be transformed into a standalone software company, Pinewood Technologies, of which Lithia will have an ownership stake of about one-sixth. Lithia and Pinewood plan to form a joint venture to bring a DMS to North America, laying the framework for what Lithia plans to do beyond 2025.

"What we are basically doing is touching on three key areas that really give us the backbone to be able to begin to build out our strategies beyond 2025," Lithia CEO Bryan DeBoer told Automotive News. "We really believe 2025, to some extent, is all earmarked and is achievable, assuming that the world stays together."

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.

Lithia entered its first international market in 2021 with the purchase of Canada's Pfaff Automotive Partners, then entered the U.K. in March this year with the sizable acquisition of Jardine Motors Group. Lithia also has acquired motorcycle and RV dealerships.

DeBoer said if he had to guess, it would be two to three years until a Pinewood DMS would arrive 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. "I'm sure we'll think of new ways to leverage the asset base and the customer base that we built."

The Medford, Ore., auto retailer will hold a 16.7 percent stake in Pinewood Technologies once the transaction closes, which is expected in the fourth quarter or the first quarter of 2024, DeBoer said. Lithia then will begin to convert its existing U.K. dealerships to the Pinewood system, something that should take around four or five quarters, he added.

Pendragon CEO Bill Berman, a former AutoNation COO, will stay on as CEO of Pinewood Technologies, DeBoer said.

DeBoer described Pinewood as a profitable software company that is cloud-based and tech-savvy. Under Pendragon, Pinewood has around 30,000 users across Europe, Africa and Asia, he added.

Steve Young, managing director of ICDP, a European research and consultancy business in the U.K., in a Monday blog described Pinewood's DMS as well regarded and capable.

With the joint venture, DeBoer said, the plan is to eventually bring a DMS to the U.S. and Canada — and not just for Lithia stores.

"I would believe that it will take us at least a few years to come to the North American market with our first pilot stores," he said. "We hope that they will be other partners, or other peers, as well as a mix of some Lithia stores. But to be fair, Pinewood is going to be driving that."

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,” according to 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."

Colin Langan, a U.S. autos analyst with Wells Fargo, wrote in a Monday investor note that the firm views the deal positively, as it further solidifies Lithia's U.K. footprint.

"More interestingly, the deal opens new market opportunities around likely higher margin DMS software," Langan wrote.

The $4.5 billion in annual revenue Lithia expects to receive from the transaction would be its largest megadeal to date by that measure. The figure is higher than Lithia's other blockbuster purchases, including its 2014 acquisition of DCH Auto Group and the deals for Jardine Motors, Pfaff Automotive and Suburban Collection in Michigan. The Pendragon transaction includes 160 retail locations across the U.K. — a majority of them new-vehicle dealerships under Stratstone or Evans Halshaw branding.

DeBoer said the Pendragon deal fills 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. Once the deal closes, Lithia estimates its annualized revenue to be more than $38 billion.

And at a price of $350 million for the Pinewood Technologies partnership and acquisition of Pendragon's dealership and fleet business, the 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."

Daniel Imbro, an analyst with Stephens Inc., said Lithia this year made clear that Jardine would serve as a foothold to further growth in the U.K., and he expected the auto retailer to pursue larger-scale deals in that market.

"I think the structure of the deal is interesting in the sense they're taking kind of an equity stake in the remaining business," Imbro told Automotive News. "It feels like a bit of a win-win. It feels like they got the dealerships for what seemed to be a pretty good price. And it also feels like it gives the remaining business, the tech business, a nice foothold into North America, which should help that business grow faster through Lithia."

By adding Pendragon, Lithia has just about everything it needs in the U.K., DeBoer said. He said the Pendragon brands are not brands that were heavy in the Jardine acquisition, such as Audi. There is some overlap among Mercedes-Benz, BMW and Porsche, but DeBoer emphasized that Pendragon's locations, unlike Jardine's, are mostly north of London, in the eastern part of the Midlands, as well as in Scotland.

A combined Jardine-Pendragon platform would represent a 3.6 percent new-vehicle market share in the U.K. — nearly two and a half times better than Lithia's market share in the U.S., DeBoer said. To be sure, Lithia plans to divest some stores in the U.K., he added, without going into specifics.

Pendragon has a brand that would be new for Lithia, DeBoer said: China's BYD. Pendragon has opened at least two BYD stores so far and is in the process of opening more outlets, he said.

Despite the heightened activity in the U.K., DeBoer said Lithia's domestic plans for continued acquisitions have not changed.

In June, he estimated Lithia would acquire around $4 billion of added revenue from domestic acquisitions in 2023. The retailer went on to buy a majority of Virginia's Priority Auto Group that month, as well as a Ford store near Atlanta. In July, Lithia bought a Honda dealership in Texas.

Following the Ford store purchase, Lithia said it had acquired U.S. dealerships this year that it expected to generate an estimated $3.5 billion in annual revenue. Lithia also divested some dealerships this summer.

"I think, domestically, it's an active market still," DeBoer said. "We believe that there's going to be other transactions. This just makes it a little easier to pick and choose the right transactions to really round out the North American footprint. The Midwest is still light. The Southeast, or our Region 6, is still growing. But we've still got a lot of places outside Florida that we don't have really any presence."

Mark Hollmer contributed to this report.