BCA shares bounce on takeover approach

Steve Clayton - Fund Manager

4 July 2018

BCA Marketplace is in the spotlight at the moment after the announcement of a takeover offer by private equity firm, Apax, caused a sharp increase in the share price.

BCA is an Automotive Services group, best known for its ownership of British Car Auctions and WeBuyAnyCar.com. Respectively they are the dominant force in trade sales of vehicles and the fast growing car buying service.

We hold the BCA shares because an auctioneer with a dominant share in a market that has a steady pace of activity is a great source of cash flow. Auctioneers don’t typically own the vehicles (although WeBuyAnyCar.com does briefly), they just take a commission on the sale.

Facilities are also simple affairs - plenty of parking space and an auction ring, so they require little ongoing investment. When the car market is strong, dealers have plenty of trade-ins to pass on, and when it’s bad, dealers want to offload stock. In short, under most realistic circumstances, a business like BCA should generate cash in reliable quantities.

Apax approach

Apax obviously think so too. So far they’ve made what looks like nothing more than an opening shot, an offer of 200p per share, made back in early May, but only revealed around a month later.

By the time Apax announced that they had made an approach, the shares were already trading around the 200p level, having had a good run in recent weeks. We hold quite significant positions in BCA on both the HL Select funds and when the news broke on Monday 11th the shares leaped higher, rising from around the 210p level to a peak of 240p in a matter of minutes.

That jump propelled BCA into becoming one of the larger positions in both funds. We took the decision to lock in some of the profit and sold around a third of the holdings, achieving an average price of 237.6p.

What happens next?

We are now in a position of wait and see. The stock has retreated to a level of around 225p, and the combination of that and the disposal of approaching 30% of our holding has left us with weightings of circa 3.5%.

If a bid at a higher level emerges, we think those holdings will generate further gains. If Apax in fact decide to walk away, and no other bidder appears (Clayton Dubillier & Rice (no relation!) have been mentioned as interested in the press) then the shares may well drop back toward their pre-bid levels, but we will still have been able to bank a significant gain on the shares we sold.

The company released full year results on 28 June and we met with the Chairman and Finance Director that day to discuss progress. As far as the bid situation goes, BCA view the ball as firmly in Apax’s court; their initial offer was seen as inadequate and they have until 8 July to make a revised proposal, or walk away under Takeover Panel rules, known as “Put Up or Shut Up”.

Meanwhile BCA is in fine form

The business itself is in fine form. Full year sales rose 20%, adjusted profits by 24% and the dividend jumped 27%. Growth came from both the Auctions business in the UK and Europe, along with double digit expansion at WeBuyAnyCar.com. The group also paid down debt during the year and BCA is in a strong position with the balance sheet as a result.

The day before the results the group had announced a big new multi-year deal with BMW that will see BCA providing a huge range of services to the BMW group as their vehicles come to the end of leases and PCP plans, involving transportation, remarketing (auctions to you and me) and refurbishments if needed.

It’s the biggest such contract BCA have ever signed and the group hope to repeat the arrangements with other manufacturers and leasing companies.

Strategy on track

We took it as evidence that BCA’s strategy of bringing a whole range of services to the automotive sector, over and above the core remarketing role, is capable of delivering real growth and value over time.

The group have been pushing further into digital products, with apps and systems to link dealers ever closer to the remarketing operations, shortening the time between dealers accepting a part-ex and turning it into cash at auction. That keeps dealers capital requirements down and increases BCA’s value to them.

Automotive Services may not be the most glamorous of industries, involving car transporters, dent repairs and auction rings. But BCA are showing that it can generate strong growth, backed by cash flows. Whether a bid at a higher level emerges or not, we are very happy to retain exposure to the group.

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