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Private equity-backed group takes 20% stake in Lookers

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The value of shares in Lookers (LON: LOOK), one of the leading automotive retail and aftersales groups in the UK, has jumped 31% in a week on rumours of a share deal, which duly emerged today, when Constellation Automotive Holdings announced it had bought a 19.9% stake.

Lookers shares had already been performing strongly, gaining 35% (YTD) and 127% over 12 months, and opened for trading today at 90p.

Constellation is Europe’s largest vertically integrated digital used car marketplace and is backed by private equity shop TDR Capital. Constellation, which already owns British Car Auctions, Cinch, WeBuyAnyCar and CarNext, announced it had bought up 78 million shares at a price of 102p per share from Tony Bramall, who stepped down as a non-executive director of Lookers in December 2020 after 14 years.

It is too early to say what the private equity owners of Constellation want to do, but the purchase of the Lookers stake followed soon after their acquisition of the Marshall Motor Group, taking it off the market.

Ian Bull, Chairman of Lookers, welcomed Constellation as a significant shareholder of Lookers, saying: “Their investment endorses the board’s view that the group remains significantly undervalued.”

Lookers: A turnaround story

The arrival of Constellation as significant investor caps a remarkable turnaround for a company that two years ago was suffering losses, a share trading suspension and was investigated for fraud. Despite the tough backdrop of Covid-19 pandemic-related disruption, including the closure of showrooms throughout Q1 in 2021, the company is now in a strong financial position. Its trading update for the financial year to 31 December 2021 shows an expected record underlying profit before tax of £82m; a strong balance sheet, with net cash of about £8.0m as at 31 December 2021 (2020: net debt £40.7m) and property with a book value of £303.9m (equivalent to 77.8p per share) as at 30 June 2021.

Chief executive Mark Raban described 2021 as “an exceptional year” for Lookers, adding: “We now expect to beat our previous estimates with record profit for the year. With net cash at the year end, we have a strong balance sheet and good capacity to invest in future growth opportunities.”

Continued strong demand

Raban attributes the continued strong demand to “a sustained preference for car-based travel amongst consumers”, which during the pandemic and the restrictions on public transport makes sense. He added, “we have been able to capture this demand and outperform the market through continued improvements to our omni-channel customer experience, which allows customers to purchase cars with us however they wish.”

The question is whether this performance can be maintained. Lookers’ results are an example of a company that has bounced back into profit after unprecedented market difficulties, benefiting from pent up demand. However, their strategy seems solid: having the best brands in the best locations, with excellent execution, proactive management, a solid pipeline of acquisition opportunities and continued investment in customer experience. An indication of the management’s confidence in the company outlook is its decision to resume dividend payments ‘as soon as possible’, depending on the 2021 full year results.

Now that short-term pressures, particularly around the Covid restrictions and the supply of cars, can be expected to fade this year, the company has real growth potential. It is also a reasonable bet that Constellation (ie. their private equity owners) will be building their stake in the company, perhaps with the ultimate aim of taking overall control.

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This article does not constitute investment advice. Make sure you do your own research or consult a professional advisor.

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