Car dealer group Pendragon has said it expects the UK automotive market to "remain tough" as the company continues to digest the recent GBP500m acquisition (click here) of rival Reg Vardy.

Concerns about the impact of last week's rise in interest rates on future weakening new car sales led Pendragon shares to drop 30½, or 5.6pc, to 510p on Monday and Pendragon expects new car registrations across the industry to fall 5% this year after data for the first half showed a decline of 4.2%, the Daily Telegraph reported.

Chief executive Trevor Finn told the paper: "We expect the UK car market to remain tough for the remainder of 2006."

Despite falling car sales, Pendragon's pre-tax profit for the six months to June jumped 44% to GBP50.8m on the back of the purchase of Reg Vardy, the report noted.

Turnover accelerated 51% to GBP2.6bn, which included four-and-a-half-months' sales from Reg Vardy.

Finn reportedly said: "The acquisition has made a significant contribution to the group's first half results."

The Daily Telegraph said the Reg Vardy acquisition caused Pendragon's borrowing to more than triple to GBP581.7m as of June with gearing at 208% compared with 70% at the end of December. Borrowings should be reduced "to more normal levels by the end of 2007", Finn told the paper.

The report added that Pendragon continues to make small 'bolt-on' acquisitions and that Finn did not rule out the prospect of making further large purchases once borrowings have been lowered.

Integrating Reg Vardy is expected to cost £5m over the full year, the Daily Telegraph said, adding that the failed bid to buy rival Lookers as part of a three-way merger cost Pendragon £900,000.

Finn reportedly added: "We are confident of further progress within the group as we continue to grow the business and integrate Reg Vardy."

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