COMMENT

There's nothing like that new car smell, but fewer Australians are inhaling the intoxicating mix of plastic, adhesives and sealers that come with a recently-purchased vehicle.

Declining car sales are hurting car dealers' profits and are now playing out in the proposed merger of two stock market-listed dealer groups, which aspires to create a giant car sales company.

In 2018 new car sales fell for the first time in four years, thanks to the drought and declining consumer confidence, particularly as house prices fall. Australians who feel less wealthy are less likely to upgrade their vehicle.

Advertisement

This year the figures look to be even worse, with the sales rout picking up pace. In the March quarter, 268,538 new vehicles were sold, down 7.9 per cent from the same three months last year.

Weak sales are only part of the car industry's problem.

The corporate regulator has cracked down on the sales of add-on financial products by car dealers after last year's banking royal commission revealed they were selling consumers near-useless insurance and overcharging them for loans.

These are important profit drivers. New car dealers earn about 1 per cent margins on selling a car. When insurance and finance and extras such as scratch-free paint and window tinting are added the margin increases to 3 per cent-plus. Service margins are closer to 12 per cent.

In particular, the Australian Securities & Investments Commission is looking at "flex commissions" on car loan interest rates. Under this arrangement, car dealers decide how much extra interest they can gouge out of car buyers, with the dealership and the bank providing the finance splitting the extra profits.

Against this background Queensland's AP Eagers has lobbed a takeover bid for West Australia-based rival, Automotive Holdings Group. The bid is all scrip-based with AP Eagers offering its own shares for AHG shares, effectively making it a merger.

If the merger is approved, the combined company would own 229 new-car dealership sites in Australia, 13 in New Zealand and 68 new truck and bus dealerships The company would command 12 per cent of the entire new vehicle sales market in Australia and have near national coverage.

This might not sound like a lot but in an industry consisting largely of small or family-owned operators, it is huge. Aside from holding a significant share of the market, the new company would also likely use its significant market power to drive a better deal with car makers for cheaper vehicles. Australia's competition regulator will examine the proposal closely.

Advertisement

Automotive Holdings Group is ripe for a takeover. In February, AHG cited falling vehicle sales as it slashed the value of its 105 car dealerships in Australia and New Zealand by A$147 million and also wrote down its refrigerated logistics business by $79 million. It is currently trying to sell the logistics business.

Shares in AHG have crashed nearly 50 per cent in the past 12 months, from $3.50 to $1.78 on Thursday, and shareholders have already expressed their displeasure over what they see as excessive bonuses paid to the executives leading this poorly-run company.

Many will be glad to get exposure to AP Eagers and try to benefit from the upside of this business, whose executives have navigated the difficult environment to remain profitable.

And given AP Eagers already holds nearly 29 per cent of AHG, the chance of a competing proposal is low.

AP Eagers said that the merged company would be better placed to pursue growth opportunities, through greater portfolio diversification and enhanced brand portfolio diversification. The company also said AP Eagers acquires more than 90 per cent of Automotive Holdings it expects to generate almost A$14 million in synergies.

"Importantly, the Offer enables AHG shareholders to participate in the upside and benefits afforded by AP Eagers' proven management expertise and strategy which is expected to enable the combined group to grow and be better placed to respond to the rapidly evolving motor vehicle retailing market" AHG told shareholders.

In the view of AP Eagers' chief executive Martin Ward, this involves a fundamental shift in the way cars are sold, according to a recent report in the Australian Financial Review. Consumers are looking for smaller dealerships and more customer engagement via technology, he says.

The biggest winner to emerge from the deal could be billionaire car salesman Nick Politis, who owns about a third of AP Eagers and could emerge with about 27 per cent of the combined entity. Greek-born Politis made his A$1.5 billion fortune selling cars but is probably better known as the long-term chairman of the Sydney City Roosters rugby league team.

The offer will remain open until September, so shareholders have a lot of time to make up their minds. But many look likely to hitch their wagons (or station wagons) to Politis and AP Eagers, and take part in the inevitable shakeout of the car industry.