Pendragon has come an awful cropper. The Derby-based UK group of 400 car dealers has just collapsed to a stockmarket valuation of less than GBP250m. That is almost the exact amount that the then-vibrant Pendragon earned from the sale and leaseback of the majority of its properties precisely a year ago.
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If it has kept its cash safe, the non-cash Pendragon assets are now valued at nothing. The Reg Vardy business Pendragon acquired last year is worth nothing, and the CD Bramall acquisition 15 months earlier is worth nothing. The two cost GBP680m to buy. At one time those three were the UK’s top three car retailers. Evans Halshaw and Lex Retail were the first of the large groups to fall to Pendragon as the pursuit of sector consolidation began eight years ago.
There have been plenty of collapses in value of big dealer groups over the years, but this one is the daddy.
It is not just the biggest chain of dealers in the UK but also the second or third largest in Europe. Oddly, the spiral of decline has occurred while competitors look on perplexed. Trading is tough. It always is. But no-one felt the intensity of heat that the dragon was suffering in his Derby den.
That property deal marked the moment when the great Pendragon adventure started drawing to a close. In the narrative that accompanied the announcement, chief executive Trevor Finn penned a gentle hint that the forecasts were too high. There was another hint in a cautious AGM statement and a third in June just before the half-year close.
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By GlobalDataInvestors love property assets and hate profit warnings. Selling dealership properties is never a great idea. When interest rates rise, you have to pay more rent and simultaneously the mortgaged motorist stops buying cars.
But the rationale for cash-raising was seductive for investors who love a bit of rampage, fire-breathing and hostile bidding for rival companies. The man with the pen in the dragon’s den was arguing that more cash bought more dealer groups. Size would be important. Car dealerships needed consolidating. Pendragon only had three per cent of the UK car retail market. Tesco had 30% of UK food. Tesco was a winning business model.
So far, size has shown little value. Scale economies are few. League tables of comparative profitability consistently show that the owner-manager businesses and the small regional groups make the best profit while the big boys can generate more heat than delight.
One issue is that branding and management of the retail proposition gets muddled up with the brand character of the cars being sold. Car makers get very insistent about their cars being sold and serviced in a particular way. Pendragon can and does buy long lines of unwanted cars being punted around the market by desperate car makers, and very often can get first refusal just because of its buying clout. But the benefits of preferred bidder status has never been visible in the P&L. It is all too easy to buy too many cars just before the auction reports change their residual values overnight by hundreds of pounds, or far more than the prospective margin.
The 2007 pre-tax profit now in prospect of GBP40m on revenues of GBP5bn is less than half last year’s result.
Indeed it was the sudden change in residuals in Q2 and Q3 that was blamed in part for the Wednesday profit warning. The other formal explanation was that the seven dealers in California (the only overseas subsidiary) lost almost all business for six weeks as the forest fires focused motorists on more important things.
There are a multitude of theories offered for Pendragon’s decline, and thanks to the Internet they can all be assimilated at leisure. Just type Ihatependragon into Google and marvel at the boisterous chat rooms you get into. So many acquisitions in so short a time have created an army of displaced dealer managers who are only too keen to rubbish Pendragon for its stupidity in sacking them.
One of the thoughtful explanations offered by a competitor is that Pendragon’s centralised management structure is wrong, and doubly wrong because it uses a regional matrix rather than a vehicle-brand matrix.
The journey to this point has taken 18 years. Trevor Finn (50) has been in charge for all that time and has inspired confidence in all his spheres of influence. He is widely dubbed ‘clever Trevor’ for his intelligent commitment to the management of change, and his persistent questioning of received wisdom. Being likeable will not be enough for his shareholders. They want the proof the business model will work, or they want it re-written.
Yesterday, Finn was saying that Pendragon had made no strategic errors and would make no change of tactic or management.
That won’t work any longer. Sir Nigel Rudd, his chairman for all 18 years, is a seasoned and dependable trouble-shooter with Alliance Boots, Barclays and BAe Systems boards all part of his varied experience. No-one expects him to watch the flame in Pendragon flicker and fail.
Rob Golding
