AutoCanada Inc., the country’s only publicly traded auto retailer, may now be the subject of its own scratch-and-dent sale. But the company may ultimately bring in more than what investors are paying today.
After suffering through a deeply underwhelming quarter and lingering concerns about its capacity to manage its business, the Edmonton company has yielded to investor Roland Keiper and formed a special committee of its board to consider strategic alternatives.
A sale of the company is just one of those possibilities, of course, but signs are pointing toward this outcome. Mr. Keiper’s Clearwater Capital Management Inc. went public last week with its request to AutoCanada’s board to form the committee, and the company confirmed its creation late on Sunday.
Clearwater, which said it had a “significant position” in the company from 2008 to 2011 that led to positive engagement with management – and an increased share price in the following years – seems a bit more pessimistic this time. Mr. Keiper, president of Clearwater, said in a June 11 letter to AutoCanada chairman Gordon Barefoot that even though the company has pledged to improve its operating performance, he has spoken to multiple AutoCanada shareholders interested in a sale of the company.
“Closer oversight and accountability of management are certainly welcome developments,” he wrote. “However, concurrent with these efforts, the time has come for AutoCanada to pursue a strategic alternatives process that will offer AutoCanada and its shareholders the potential opportunity to sell at an attractive premium and avoid the risk of further operating performance risks.” Clearwater did not reveal how much it currently owns, but an acquisition of 10 per cent of the company’s voting power would require a public disclosure.
AutoCanada said on Sunday the committee would “explore a range of strategic and financial alternatives that could enhance shareholder value” while also “improving the efficiency of our operations, specifically targeting further reductions in our operating expenses.” The company says it does not intend to provide updates on the strategic review process. The shares, which hit a 52-week low of $15.48 on June 6, are up more than 10 per cent since, closing on Monday at $17.58.
Even with that small bounce, AutoCanada shares are modestly priced, based on various earnings multiples, compared with other North American automobile dealers and its own history. A forward price-to-earnings ratio of just more than nine is near its lowest levels in six years and places it below the current industry median, according to S&P Global Market Intelligence. An improvement in performance can bring more gains; a sale might yield an even higher price.
AutoCanada’s first problem was the trouble in the Canadian oil patch, because the company had a heavy concentration of dealerships in Alberta. It has moved to geographically diversify, even heading south to buy an Illinois auto group. And in more good news, Ford Motor Co. has said it will now allow its affiliated dealerships in Canada to be owned by public companies. Auto maker prohibitions on public ownership of their dealerships have stunted AutoCanada’s growth.
But the company’s current operational issues have overwhelmed investor enthusiasm about that potential. Maxim Sytchev of National Bank of Canada notes that AutoCanada has higher gross margins (revenue minus cost of the goods sold) than publicly traded U.S. auto dealers. However, it has lower margins of EBITDA, or earnings before interest, taxes, depreciation and amortization, which means the company’s selling, general and administrative costs are higher than those of its peers, Mr. Sytchev says. This “suggest[s] that the cost structure is not as lean as it should be given the revenue generation. On the positive side, gross margins tell us that AutoCanada is running an inherently ‘good’ business.”
Mr. Sytchev says bringing AutoCanada’s EBITDA margin to the U.S. median could add more than $7 to the shares. He has an “outperform” rating and a $23.50 target price, which he reduced from $29.50 in May. Analysts’ average target is $24.11, according to Bloomberg.
Mr. Sytchev also notes that Lithia Motors Inc., an Oregon company that specializes in owning dealerships in very small U.S. cities and rural areas, has previously expressed an interest in expanding in Canada.
David Milstead