There has been an interesting new twist in the ongoing battle between rival UK dealer groups Lookers and Pendragon to acquire the Reg Vardy dealer operation.

A week ago, Lookers' £GBP8.75-per-share offer outbid Pendragon's earlier GBP8.00 bid and it was accepted and recommended by the Vardy board.

Today (27 January), however, Pendragon said in a statement that it had made two formal approaches to the Lookers board to discuss the terms of a possible three-way consolidation of Lookers, Reg Vardy and Pendragon.

This would be effected through the existing cash offer by Pendragon for Reg Vardy at a price of GBP8.00 per Reg Vardy share and a share exchange offer by Pendragon for the entire issued share capital of Lookers.

Pendrgaon said that, following a mid-December meeting between itself and Lookers, on 21 December it made an initial indicative offer to acquire the entire issued share capital of Lookers by way of a share exchange offer.

The exchange ratio proposed was one new Pendragon share for each Lookers share. This was rejected by Lookers because it "very substantially undervalue[d] the company".

On 12 January, Pendragon revised its offer to to an exchange ratio of 1.15 new Pendragon shares for each Lookers share. Based on the closing share prices of Lookers and Pendragon on the business day prior to the offer being made, the revised offer valued each Lookers share at GBP6.00, a 26.9% premium over the Lookers share price at that time and a premium of 44.3% premium over the closing Lookers share price of GBP4.155 on 15 November 2005, the day prior to Reg Vardy's announcement that it had received an approach from Pendragon in relation to a possible offer.

On 16 January, Lookers told Pendragon that its board was not prepared to discuss the offer and went ahead with its offer to acquire Vardy shares at GBP8.75 each, and the Vardy board recommended acceptance.

Pendragon today said it was making its own announcement to allow it to freely discuss its offer with Lookers shareholders.

"Pendragon believes that the synergies available from a three-way combination of Lookers, Reg Vardy and Pendragon should be considerable and, through a share exchange offer, Lookers shareholders would benefit from the proven track record of Pendragon management of integrating large acquisitions and extracting synergies," the company said in its statement.

"Pendragon is confident that it has the management experience necessary to integrate the businesses of both Reg Vardy and Lookers simultaneously and successfully.

"Such a combination would also allow Lookers shareholders to exchange their existing holdings for shares in an enlarged group which would be both well-capitalised and the clear industry leader.

"Pendragon believes that the earnings of an enlarged Pendragon group following the acquisitions of Reg Vardy and Lookers, before synergies, would be immediately enhanced compared with the earnings of Pendragon on a stand-alone basis (although this statement should not be interpreted to mean that the earnings per share of such an enlarged Pendragon group would necessarily be greater than or equal to those of prior years)."

The offer is subject to some conditions including Lookers' proposed acquisition of Reg Vardy not proceeding; Pendragon being permitted access to Lookers to undertake a limited due diligence exercise and the Lookers board recommending the offer.

It is also conditional pending the approval of Reg Vardy shareholders.

Pendragon noted that its earlier arrangement with Sir Peter Vardy which allows it to acquire 9,348,111 Reg Vardy shares, or 16.6% of the existing issued share capital of Reg Vardy, at a price of GBP8.00 per share was still in place. This call option would be used to vote against the acquisition of Reg Vardy by Lookers.

In addition, as a consequence of entering into irrevocable undertakings in favour of Pendragon in connection with its existing cash offer for Reg Vardy, certain Reg Vardy shareholders, including Reg Vardy directors and persons connected with them, are prevented from voting at any shareholder meeting to approve the proposed acquisition of Reg Vardy by Lookers.

Therefore, if Pendragon exercised its call option, a total of 5,942,906 Reg Vardy shares would be prevented from voting in favour of the proposed acquisition of Reg Vardy by Lookers.

The Reg Vardy shares held under the call option represent 18.6% of the Reg Vardy shares that are able to vote at the shareholder meetings, Pendragon said.

If a further 3,229,388 Reg Vardy shares, representing 6.4% of the Reg Vardy shares able to vote at the meetings (i.e. 5.7% of the total Reg Vardy issued share capital), were voted against the relevant resolutions in addition to the shares subject to the call option, Lookers' proposed acquisition of Reg Vardy would fail.

Clearly, this is one motor industry story that is going to run for a while yet.