Insights Into Automotive M&A
This article was originally published at Auto Remarketing.
$1 trillion is a lot of money.
That’s the estimated amount of uninvested “dry powder” that Private Equity (PE) and Venture Capital (VC) funds have sitting on the sidelines that they can deploy into public or private companies.
The three main drivers of mergers and acquisitions (“M&A”) are company valuations, availability (and affordability) of financing and investor/CEO confidence -- all of which suffered significant setbacks in 2020 due to COVID-19.
Many PE & VC investors have turned their focus to supporting their existing portfolio through these difficult times, and not on investments and acquisitions. “Strategic Buyers” -- corporations who invest in or buy companies to fill in gaps in their offerings, or to “outsource” innovation -- have been more focused on stabilizing their businesses and helping their employees and customers. For these reasons overall M&A activity is way down since the pandemic started.
Having said that, I expect opportunistic M&A to pick up the latter half of the year, with investors being able to pick up companies who may have no other choice but to raise money or sell.
While there are strong signs of life in new and used car volumes, as well as auction volumes and prices, there are also signals that some of the weaker players aren’t going to make it through the crisis. Warren Buffett once said, “you only find out who is swimming naked with the tide goes out,” and I think there will be a number of companies with weak balance sheets who might not survive. Advantage Rent A Car filed for Chapter 11 protection last month, claiming more than $500 million in debt, a week after Hertz declared bankruptcy, with over $19 billion of liabilities.
But, investor interest in physical dealerships continues to be resilient. Brodie Cobb, Founder and CEO of The Presidio Group, noted this week that physical dealerships aren’t perceived to be distressed assets so valuations have not taken a hit. He also noted that pandemic has made private vehicle ownership attractive to consumers who previously shunned owning a vehicle, which may be a more bullish indicator of strong vehicle sales and support interest in acquiring dealerships. In some markets, sales have been so strong that I’m hearing from dealers who are worrying about running out of new car inventory by mid-summer.
Big deals are continuing to get done, albeit at a slower pace.
On May 26th it was announced that KAR Global (the parent company of ADESA) sold $550M of convertible preferred stock to Apax Partners. Under certain circumstances, this permits Apax to convert their investment to common shares of KAR. In an economic environment where ADESA locations where closed entirely for a couple of weeks in March, and even now are only open for digital sales, it’s not surprising that they might want to shore up their balance sheet to ensure that they’re in a strong position to weather any economic scenario that plays out over the remainder of the year.
Vroom, drafting behind Carvana (who at the time of writing has a market capitalization of over $18 billion), was preparing to IPO in mid-June. If the IPO prices at the top end of the range, Vroom would raise $319 million with a market cap of about $1.9 billion. In 2019, Vroom sold 19K units at $1,700 gross profit per unit, vs. Carvana, who sold 178K units at $2,900 gross profit per unit. Vroom sold 11% of Carvana's volume in 2019 at 60% of the gross profit per unit. So it’ll be interesting to see how receptive the markets are to this IPO.
Last, Volkswagen AG finalized its $2.6 billion investment into Argo AI, the Pittsburgh-based self-driving car startup that came out of stealth in 2017 with $1 billion in backing from Ford Motor Company.
Despite these promising “signs of life”, the M&A and financing markets are expected to remain on hiatus for at least a few months. And to complicate things even more, by the time the pandemic subsides, the U.S. will likely be in the midst of political campaigning in the run up to the November presidential election, historically an uncertain and unpopular time for deal-making.
With $1T of money sitting on the sidelines itching to get deployed, as well as a number of large companies with strong balance sheets that are likely to be opportunistic with shopping for “cheap” deals, we may very well see M&A in the automotive space heat up over the remainder of the year.