These challenges are well-known, including declining car sales and shrinking revenue after the corporate regulator, the Australian Securities and Investments Commission (ASIC) clamped down on commissions collected by car dealers from the sale of add-on insurance, flex commissions and other financial loans, which were detrimental to customers.
Apart from these challenges, AHG has had its own issues, which has made it a sitting duck.
They include a questionable strategy, including the purchase of assets including a refrigerated logistics business that it later tried to sell unsuccessfully to Chinese group HNA for $280 million. HNA terminated the sale in the middle of last year, which resulted in a share price rout in AHG’s already falling share price.
Then last November, things took a turn for the worse when AHG was hit with a protest vote at its annual general meeting in response to a decision by the board to give the company’s chief executive, John McConnnell, a $400,000 discretionary bonus as well as award hundreds of thousands of dollars in bonuses to the senior team. Given the asset deal had fallen over and the share price had fallen and profits were not looking flash, it was seen as the board having a tin ear.
One of AHG’s key shareholders, which is also a shareholder in AP Eagers, was particularly unimpressed.
In contrast, AP Eagers is perceived as being run by a team of good administrators who have navigated the company through some serious industry headwinds and come out on top, with profit and a rising share price to prove it.
The experience of Retail Food Group franchisees was ‘dwarfed by the approach of car manufacturers to the dealership network’.
Victorian Automobile Chamber of Commerce in a letter to Senator John Williams
Put simply, the scrip offer will enable AHG shareholders to benefit from any upside and take away any downside from AHG, particularly given the concern that if things keep going poorly it might have to raise capital.
If shareholders approve AP Eagers’ all scrip bid for AHG, it will give the merged entity a market cap of $1.8 billion and create an industry behemoth with 242 new dealership locations and 62 bus and truck locations covering 33 car brands including the top selling Toyota, Ford, Honda, Holden, Volkswagen and Kia.
It means the new entity might have the muscle to negotiate a better deal on cars with manufacturers. It also means dealers will be able to disperse cars more quickly. For instance, if a car manufacturer wants to shift stock it will be easier to do.
It is estimated to give it an 11 per cent market share, which might not sound like a lot but in a fragmented market is significant.
Car dealerships are never far from the minds of politicians – or the regulators – as many of them are small businesses, they employ almost 70,000 people and pay wages in excess of $4 billion a year. Some car dealerships are located in key regional seats, which give them the ear of their local politician.
It is why they got such an airing at the highly publicised parliamentary inquiry into the franchise industry.
One lobby group, the Victorian Automobile Chamber of Commerce wrote to Senator John Williams, who was behind the push for the inquiry, that the experience of Retail Food Group franchisees was “dwarfed by the approach of car manufacturers to the dealership network”.
It was a big statement but backed up with concerns that franchise agreements had the scope to “impose unilateral unreasonable terms on a take-it-or-leave it basis that forces the franchisee to accept unreasonable terms”. It said despite the franchise code, franchisors continued to impose hidden costs.
Jenny Buchan, a professor at the school of taxation and business law at the University of NSW, who specialises in franchising, says automotive dealers operate under onerous contracts. She says the parliamentary inquiry recommended that the unfair contract terms provisions of the Australian Consumer Law should be expanded to cover all franchise agreements. “As long as this includes the automotive franchises many of the currently oppressive terms they trade under should disappear,” she says.
Buchan says that at a national level consolidation of the sector is inevitable and may result in greater efficiencies for the ultimate consumer. She says a secondary agenda might be the sale of some of the vast land holdings that dealerships occupy in prominent locations.
Whether it attracts regulatory interest from the Australian Competition and Consumer Commission will depend on how it measures the new entity’s reach. From a straight market share, the combined entity would be 11 per cent which would not run into competition issues. But a well-placed industry insider said the merged entity would have a lot of clout in some brands and the question is whether they threaten the viability of smaller dealer groups.
Indeed, Buchan says at a local level in the eastern states there could be some dealer overlap and smaller dealer groups might go out of business.
In the meantime, shareholders will wait to see the reaction of the AHG board, which so far has told shareholders not to take any action. They have, AHG’s shares, which slumped 50 per cent over the past 12 months, jumped 15 per cent on news of the bid. It will be an interesting wait.
Adele Ferguson comments on companies, markets and the economy.