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Greenfield's Point of View - December 2020

Automotive Tech M&A Accelerating

One Month To Go…

The year has flown by.

This will be my last newsletter for the year, the next one published in January. So, I’ll leave my reflections on the year to the next issue, where I’ll look back on 2020 and forecast some of the trends we’ll likely see in 2021.

The Economy

COVID-19’s effect on consumer demand and the economy has accentuated winners and losers. Some businesses have thrived and grown, while others have struggled or failed, reflecting the broader economy’s “K-shaped” recovery.

Winners have been companies facilitating the shift in consumer demand, including online retailers and service providers, technology firms and companies delivering the goods people are buying online.

Faltering businesses include those unable to make the transition, such as many restaurants and brick-and-mortar stores. Retail-store closings in the U.S. reached a record in the first half of 2020, and the year is on pace for record bankruptcies and liquidations.

Forecasters in the U.S. are starting to downgrade growth expectations for the final month of 2020 and the opening months of 2021, as coronavirus cases surge, restrictions on activity increase and Congress declines to provide more stimulus.

The Stock Market

The headwinds facing the economy have not deterred a resilient stock market.

U.S. stocks had a banner November, at one point pushing the Dow Jones Industrial Average over 30,000 for the first time, and giving the Dow its best month in over 33 years, as investors cheered the prospect of COVID-19 vaccines, halting the pandemic and the possibility of fresh stimulus spending to bolster the economy.

The bull run has put the Dow up 62% from its March low, when the U.S. Federal Reserve ended a panic that wiped out trillions of dollars in investments by outlining a plan to counter the pandemic’s economic stress.

Among the big reasons for climbing stock prices is investors’ optimism about the strength of the economic recovery in the years ahead. While recent data show economic growth slowing and consumer confidence flagging, markets are forward-looking and betting the recovery will gain steam, particularly with COVID-19 vaccines on the horizon.

The IPO Market

Embracing the strength of the stock market, IPOs have already posted a record year. To date, there have been 405 IPOs, beating the previous record of 397 IPOs back in 2000, the height of the era. And we haven’t even gotten through December, yet.

The first quarter of 2021 should continue to set new records for IPOs, if markets hold -- seeing a lot of activity because of the low interest rate environment, companies benefiting from digital transformation, and a pipeline of strong venture-backed businesses that have been built over the last decade.

With about $1.5 trillion in capital sitting on the sidelines waiting to be deployed, private equity and VC firms have plenty of firepower. For much of 2021 the holders of this capital have been cautious. We could see that changing as investors sitting on piles of cash get more bullish.

Automotive Industry

The auto industry has come through the pandemic in some ways stronger than ever.

Combined, General Motors, Ford and FCA delivered a total of more than $10 billion in earnings in North America during the latest quarter, versus losing a combined $1 billion in the same quarter a year before.

Coupled with strong performance from the automakers, the public dealer groups have also all reported record profitability. Despite the virus, high unemployment, and the financial downturn, it’s turned out to be a great year to be in automotive retail.

When we have healthy dealers and OEMs, we have happy vendors. And we tend to also have strong interest in physical dealership buy/sell activity.

The pace of physical dealership sales has been strong in 2020, and there’s a robust pipeline of deals that will close over the next 6 months. Dealership valuations have been resilient through the pandemic, buoyed by strong earnings over the latter half of 2020.

The hope is that both dealers and OEMs will come out of the pandemic much smarter about running their operations profitably and being that much more judicious about their cost structures.

For example, in terms of new car inventory, dealer stocks have been running about 25% thinner than normal for months, a hangover effect from two months of pandemic-related factory closures last spring. The shortfall is requiring many buyers to order their cars and wait a few weeks, running counter to the American car shopper’s desire for instant gratification, and dealers’ impulse to send the customer home in a new car the same day.

The benefits of leaner dealership lots have been an unexpected byproduct of the pandemic. Auto makers have been straining to boost output after the spring shutdowns, a task made difficult by an unexpected surge in demand for new vehicles. The result has been a seller's market, with car companies able to hold the line on discounts, driving prices to record highs.

And, because of the inventory crunch, car companies have been giving priority to their most popular models and feature combinations, which has reduced complexity and cut supply-chain costs.

Meanwhile, dealers are saving money by holding less inventory, and cars are selling faster, at higher average prices.

We’ll be eager to see if some of these operational benefits brought on by COVID-19 persist after the recovery.

The 2020 Deals Continue

November saw some sizable deals in the M&A space, and we are likely to see a couple of other big ones announced before year end.

S&P Global agreed to acquire IHS Markt for $44b, the largest merger of the year.

S&P traces its roots to an 1860 compendium of information for railroad investors and is best known for its bond ratings and its iconic stock-market indexes, which serve as shorthand for the health of global markets.

IHS Markit, formed in 2016 by the merger of two smaller players, tracks millions of data points in financial markets, but also has the Carfax, Polk automotive data and AutomotiveMastermind brands.

November saw a second large deal, with CDK Global announcing the sale of their CDK International business segment to Francisco Partners for $1.45b (representing ~15x adjusted EBITDA including expenses for the standalone business).

During CDK Global’s last earnings call they signaled that they’d be looking at making acquisitions in the short term. The sale of their international business will give them a war chest to go hunting for M&A targets.

Last month, TrueCar completed the sale of ALG to J.D. Power for $135m. This puts ~$275m of cash on TrueCar’s balance sheet, which equates to almost $3.00 per share in cash. We’ll be eager to see what TrueCar decides to do with this cash, beyond buying back shares.

Electric Vehicle Investments

It seems like we can’t get through a week this year without another electric vehicle manufacturer announcing plans to go public via a special purpose acquisition company, or SPAC. A SPAC is a business that raises money on the stock market to buy an operating company, and in the process provides a fast-path for a private company to become public.

Electric vehicles have been hot this year with investors, with a number of companies going public via SPAC -- including Fisker, Nikola, Lordstown Motors, and Canoe.

Volkswagen Group CEO Herbert Diess said the automaker will pursue a sweeping transition to electric cars, declaring it a matter of survival. VW is pressing ahead with aggressive investment in new technology to avoid falling behind as the auto industry fundamentally changes.

Diess said, "If you are not fast enough, you are not going to survive. In the long run, climate change will be the biggest challenge mankind is facing."

Investment into electric vehicle technology by OEMs will continue – as automakers look to outsource research and development, as well as hedge risk by trying to bet on the winners.

Last month, British electric van startup Arrival, which is backed by Hyundai and BlackRock, has agreed to merge with SPAC CIIG Merger Corporation to get a U.S. listing at a market valuation of about $5.4 billion.

Arrival, which is also developing self-driving technologies, has an order for 10,000 electric delivery vans from UPS, with an option for an additional 10,000 units.

Electric Last Mile Solutions, an electric vehicle startup focused on electric delivery vans, is in talks to go public through a merger with SPAC Forum Merger III Corporation. A $250 million dollar reverse merger with Forum could value the company at over $1 billion based on previous EV SPAC deals.

It does feel like the combination of Electric Vehicle manufacturers and the SPAC is fueling a bubble. Like all financial bubbles, this one is driven by dreams of enormous wealth. Elon Musk has overtaken Bill Gates as the world’s second-richest person.

Competition is intense and while electric motors are simpler to build than combustion engines, developing a vehicle that’s safe, reliable and exciting is incredibly difficult.

Online Marketplaces

The online used car space has been particularly hot this year, buoyed by Carvana’s traction in the market and matching $40 billion dollar market cap. Shift and Vroom have gone public this year, and CarLotz is expected to go public soon via SPAC.

We’ve also been following a more aggressive evolution of the U.K. online automotive marketplace, where Cinch, owned by the largest wholesale auction player, is now looking more like a dealer given they are offering their own vehicles for sale to consumers.

This month, Ford Motor Company announced that they will launch a new online used-vehicle platform and brand early next year called Ford Blue Advantage that will link all 3,100 U.S. Ford dealers' used inventory and feature guaranteed pricing and delivery.

This sounds a lot like Ford powering their own third-party marketplace to compete for consumer attention with other players in the market, including Autotrader,, CarGurus and Carvana. Online vehicle marketplaces owned and operated by OEMs haven’t had a lot of luck in the past, but this new initiative from Ford will be one for us to watch.

A Final Word

As I’ve said all year long -- It’s an exciting time to be in the automotive space.

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