Nostalgia isn’t a good look for a fund manager. We’re meant to be dead-eyed, cold-blooded sharks, always swimming forwards because if we stop we’re dead in the water*. Sadly, though, Jaws doesn’t manage money. For now that’s still the domain of humans, with all our emotions, biases and memories. The recent wave of takeover speculation was the trigger for another wave of reminiscing. Reeling off the names of those companies that were once stalwarts in many a UK equities portfolio - Meggitt, Aggreko, Fenner, Invensys – obviously, focusing more on the ones that we called right. This morning, another name can be added to the list.
Lookers was founded in Manchester in 1908 by John Looker as a bicycle retailer, but swiftly pivoted to selling automobiles. Over the following decades it grew throughout the north of England before listing on the London Stock Exchange in 1973. It has since expanded across the UK to become one of the country’s largest car retailers, representing 35 manufacturers from 147 dealerships. Its recent performance has been chequered. Looker’s stock was suspended for nearly 7 months in 2020 after an investigation identified misstatements in the group’s accounts over a number of years. This led to wholesale management changes being made and since then both operational and financial performance has improved markedly. Under the leadership of a new CEO, industry veteran Mark Raban, the group has delivered record levels of profitability and repeatedly reported results ahead of market consensus. As at yesterday’s close, Looker’s stock had provided a total return of +138% since its shares recommenced trading versus the FTSE All-Share’s +24%. This morning, the company announced it was recommending an all-cash bid from Canada’s Alpha Auto Group (AAG) at a price of 120p, a 35% premium to yesterday’s close.
As holders of Lookers in the SVM UK Opportunities fund, it would be reasonable to assume we are pleased by this outturn. And we are pleased… but not entirely satisfied. An offer of 120p is equivalent to a PE of around 8x 2023 consensus forecasts, a level in-line with the group’s long-run average so hardly a knockout. Lookers is still in the relatively early stages of its operational optimisation plan which had the potential to deliver significant earnings growth. At the end of March the group had a net cash position of £93m, offering it significant M&A optionality of its own. While accepting that there will be headwinds from a toughening macro environment, we felt Lookers was trading at a discount to its intrinsic value and a strategic buyer should have been applying a premium to that level.
Are we surprised that the board have recommended AAG’s bid? Not particularly. In recent meetings with management, it was clear that like their peers at many other smaller UK-listed businesses they were frustrated by their company’s share price. Generating interest in a UK small-cap is hard. Generating interest in a UK small-cap car retailer is really hard. Generating interest in a UK small-cap car retailer whose stock was suspended 3 years ago… that takes things to another level entirely. At 120p they’ve negotiated a price that most shareholders will think is ok, as they accept that UK public markets will just not value a company like Lookers. There are plenty of vulnerable fish in the water, and, as AAG’s bid demonstrates, the sharks are circling.
*Although, it turns out this is a myth.
Written by Craig Jeruzal and Neil Veitch.