Public ownership of dealerships should be business as usual
Over the past few months the topic of Canadian public companies has been the subject of many national and local news articles, conferences and general chatter amongst the finance and professional services industries.
I have never understood the concerns with public companies owning a group of dealerships in Canada. That is why I am not sure what the fuss is all about now. I have always thought of public companies as simply another alternative in the complex world of dealership financing.
As in all business situations, there are many sides to each and every argument, some valid, some self-serving and others way off the mark. Let’s examine the public company issue in the context of vehicle dealerships in Canada.
First, lets take a look to other parts of the world to see what their dealership environment are like. Low and behold most of the G8 countries have many booming dealer networks and all but one have publicly traded dealer groups within their domains, with the one exception being Canada.
Why unpopular in Canada?
Our list of Canadian manufacturers and distributors, vehicle brand owners to call them another name (VBO) are made up largely of public companies. Ford, GM, Toyota, Honda etc., are all companies whose shares are publicly traded. Some have significant “family” blocks of shares like Ford and Toyota and others are more widely held like GM, if you exclude the Canadian and U.S. governments.
So why have public companies been so hard for dealers to establish in Canada?
Canada is relatively new at the dealer group game. Dealer groups have really established themselves in our country in the last 15 years. In many other countries large groups have existed for much longer.
One might believe that it just because there has not been a need. Dealer consolidation has blossomed without the need to finance acquisitions and investment through the public markets. This implies that consolidation capital has been relatively easy to come by from traditional sources.
The truth is that public groups have been discouraged by the VBOs. Unlike all the other countries in the G8, Canadian VBOs don’t really like the idea. Cars 4 U.com tried through a reverse takeover many years ago and did not make the inroads they had hoped for.
Barriers to growth
AutoCanada has been successful at paving the way. Although they are a very profitable group, they still face serious headwinds with some VBOs. Others groups have tried but stopped short of launching due to Canadian VBO attitudes and policies.
VBOs like to deal with individuals. When something goes wrong, they want to know who to talk to. They also want to know the person has the authority to commit the dealership to action.
VBOs are fearful that the public markets will have more influence that they will. They fear that certain VBO demands will not be approved by shareholders, thus altering the dealership commitment in the DSSA.
VBOs also fear that competitive information will require disclosure.
Some private dealer groups are also fearful of public companies. Right now these dealer groups have little competition when it comes to acquisitions. Introducing public companies into the mix might elevate prices and make it more difficult to acquire.
I believe that most of this fuss is about a lack of understanding and the resulting fear. The facts in other countries indicate that VBOs and dealer groups need not worry.
The fears that VBOs exhibit are already alive and well in the marketplace today. Thanks to the Internet and the myriad of consumer and industry websites, chat rooms and social media friends and followers, nothing is private anymore. With a little digging anyone can find out just about anything. The last place they will look will be a publicly traded dealer group’s press releases or financial and / or shareholder reporting. That stuff is tame compared to what’s on the Web.
Dealership control is also not an issue. Most publicly dealer groups have a management team that is visible and front and centre when needed. In fact I would suggest that there is more access to a public company CEO than some of today’s private dealer principals.
Management is charged with running the operations. Leaders like Alan Mullaly and Sergio Marchionne are certainly front and centre and accountable. So is Mike Jackson CEO at AutoNation. The last time I looked none of these respected gentlemen controlled the ownership of Ford, Fiat or AutoNation. They do, however, have a firm grasp on the control of management.
As for control by the public shareholders, that too should not be a concern to VBOs. Shareholders and VBOs are on the same page. VBOs want their dealers to represent the markets they have been awarded in accordance with VBO standards and policies. When they follow the rules, low and behold earnings increase. If an investment does not work out, the VBO has the DSSA and framework agreements to fall back on. They also have required public disclosure and public company embarrassment to support their initiatives. Shareholders want exactly the same thing. Shareholders would want management to divest of a poorly performing investment and redeploy the capital to something more likely to increase ROI.
So from the VBO and public shareholder standpoint I see many more synergies that not.
As far as other dealer groups are concerned, most will tell you that the competition already exists. Private groups all battle for the good stores that become available. Having public companies in the mix would not change much at all.
Using the U.S. as a proxy, publicly traded dealer groups number seven in total and have less than three per cent combined market share. Some private dealer groups in the U.S. have a value that is higher than some of the public companies. There appears to be a place in the competitive dealership world for dealers of all sizes and ownership structures. I expect that Canada would be the same.
So why all the fuss? Lets get on with business!
I believe that public companies will play a significant role down the road in Canada. The Canadian dealership market has a high degree of consolidation. The pace of consolidation is not slowing.
Private dealer groups, like dealers with no succession plan, will some day be looking for an exit strategy. At some point every dealer becomes a seller. The same holds true for dealer groups.
The public company alternative solves the problem of access to capital. We all know that dealerships are not getting any cheaper. Some Canadian dealer groups are worth hundreds of millions of dollars. How do they exit? How do the VBOs ensure consistent market representation in key metro markets?
I believe its only a matter of time, and for my two cents worth, Canadian dealers should have a level playing field with dealers all over the world. I never understood the fuss and I surely do not understand the fuss in today’s business environment. The dealer of the future is going to need this financing tool. So will the VBOs. Let’s get on with it.
