Automotive News Canada - January 2023 - 16

EXPERT INSIGHTS
SOLID OUTLOOK FOR M&A ACTIVITY IN 2023
Dealership valuations are expected to
either remain steady or soften a bit in
2023. But merger-and-acquisition (M&A)
activity is expected to remain robust,
even as a variety of factors - the emergence
of electric vehicles (EVs), high
interest rates,
inventory shortages and
inflation, for example - continue to roil the
auto industry. That's the assessment of
three experts: Farid Ahmad from DSMA,
Peter Heasty from Baker Tilly Dealer
Acquisitions Inc. and Landon Robertson
from Templeton Marsh. Read on for more
detailed insights and perspectives.
Q: Where are dealership valuations
headed in 2023? Did expectations for
valuations this year actually come to pass?
Farid Ahmad: Dealer valuations will head down next year, based on what we're
witnessing with the impact of higher inflation and interest rates on the economy.
That being said, dealers will be sitting on large amounts of cash and have a lot on
their balance sheet that they will be looking to deploy. As for expectations, the
market was much stronger than we anticipated. Our valuation volume grew significantly
this year, which prompted us to increase our internal M&A resources
to meet the growing needs of our clients.
Peter Heasty: I think dealership valuations will remain
steady in 2023. The ongoing consolidation of the last
several years will continue. There is only so much
inventory of new car dealers in the market. So, despite
higher interest rates and uncertainty, the feeding
frenzy will continue, especially since most groups are
still flush with cash and desperate to deploy that cash.
Landon Robertson: Dealership multiples
"
have
Ahmad: Recent buy/sell trends over the
past few years - such as consolidation
and dealers selling in order to retire - will
continue, if not accelerate. If anything,
the impact of the economy in 2023 will
push dealers to make decisions sooner
than later.
Q: Will vehicle inventory levels have
any impact on M&A activity in 2023?
Left to right: Farid Ahmad, Peter Heasty, Landon Robertson
Robertson: The low inventory levels
have been managed by dealers for
almost three years, so it has become
part of the normal course of business in
the M&A space. We believe inventory
shortages will remain across the industry
for some time before production ramps up to pre-pandemic levels - that
is, if OEMs ever manage excess inventory that way again. The order pipeline
is still an important talking point throughout the acquisition process as many
dealerships have hundreds of pre-orders that they will not get credit for unless
it is negotiated in the transaction.
Ahmad: M&A activity will slow down until inventories become more consistent
and return to normal, but it won't stop transactions from taking place.
I do expect large retail
groups in Canada to
continue looking south
of the border.
"
-Peter Heasty, Baker Tilly
started to soften due to record dealership profits
during the past couple years. Now that 2018 has fallen off dealerships' threeyear
analysis, average normalized income is comparably high, despite the pandemic.
For this reason, multiples have naturally trended downward, but remain
strong for the high-demand brands.
Q: We're entering 2023 with an uncertain economic outlook, particularly
with the specter of high-interest rates and inflation. How is this likely to
affect dealership buy-sell activity?
Heasty: As stated above, the short-term turmoil will
not deter buyers looking to gain market share. In fact,
the uncertain economic outlook will likely push more
sellers to the surface. For many sellers who have
been pondering selling, the uncertainty of 2023 may
be the final factor that gets them to pull the trigger.
Robertson: Access to capital and the cost of capital is,
of course, the main factors impacted by the high interest
rates and inflation. Financing partners have shown
more risk aversion, especially with both smaller groups
and dealers that do not have a proven track record of
improving operational results. Additionally, when financing
sources see dealerships being purchased at record profitability, the uncertainty
about whether this is sustainable weighs on their willingness to lend. We still expect
less impact on larger groups in Canada, as many have large acquisition facilities or
revolving loans in place and can absorb the perceived risk across their platforms.
"
It has become more
important than ever
across dealer groups.
- Landon Robertson, Templeton Marsh
to have scale and take
advantage of synergies
Heasty: Inventory levels will not affect M&A activity
in 2023. The expectation is that inventory levels
will be better than in 2022 and will stabilize in 2024.
So, the general climate is that inventory levels are
improving, and a continued short-term shortage will
not impact buy/sell activity.
Q: As EVs continue to become more popular, how
does this affect dealership buy-sell activity?
Ahmad: At this point, not much. It all will depend
on the future volume of EV sales. The demand from
car-buyers definitely is there. And dealers will support the market. But more EV
production and dealer inventory are needed to meet consumer demand.
Heasty: The introduction of EVs on a large scale a few years ago caused concern
and uncertainty among dealers. But as EVs enter the market on a mainstream
level and most manufacturers support the dealer model, the introduction
of and transition to them is starting to become commonplace. So rather than
fueling further uncertainty, we're entering a stage of
normalcy. And in many ways, as another year or two
goes by, dealers will just plug into (no pun intended)
the business model and it will be business as usual.
Still, there are dealers who would rather sell today
than venture into the uncertainty of a growing EV
business model. So those dealers may sell now,
rather than wait to see how EV business affects
profitability.
Robertson: The EV discussion is still in the infancy
stage and the true impact has yet to be seen. The
most important thing at this point is knowing which
"
OEMs are prepared. Some have publicly discussed their future EV lineups, financial
investments, and partnerships to position themselves once the EVs fully roll
out. Those OEMs that are prepared and well-positioned are attractive to many
buyers, but this is not considered a stand-alone advantage in the buy-sell space.
Automotive News Canada - January 2023

Table of Contents for the Digital Edition of Automotive News Canada - January 2023
