Rival dealers reject Pendragon plan for three-way merger

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The Independent Online

The country's leading car dealer, Pendragon, proposed a three-way merger yesterday with two of its rivals, Lookers and Reg Vardy, to create a single retailer with sales of £6bn a year.

The proposal was rejected by Vardy and by Lookers, which has made a recommended 875p-a-share offer for Vardy, trumping an offer worth 800p from Pendragon.

But on the stock market, shares in Pendragon and Lookers surged while Vardy slumped in value, suggesting shareholders may support the Pendragon plan.

Under the deal, which was first put to Lookers in December and again earlier this month but rejected on both occasions, Pendragon would proceed with its 800p offer for Vardy and then merge with Lookers in an all-share deal. Pendragon shareholders would emerge with about three-quarters of the enlarged company and Lookers shareholders with the remaining 25 per cent.

The merger would bring together the No 1, 3 and 8 players in car retailing, creating a group with about 6 per cent of the UK new-car market and 176 dealerships representing 12 major manufacturers ranging from BMW, Jaguar and Land Rover to Saab, Volvo and Mini. Lookers said the offer "fundamentally undervalued" it and Vardy said it was continuing to recommend the 875p offer from Lookers compared with Pendragon's 800p approach.

It is possible Pendragon will be able to block the Lookers/Vardy deal going through using the 16.6 per cent stake in Vardy which it has the right to buy under a call option with the group's chairman, Peter Vardy.

Lookers is using a scheme of arrangement to acquire Vardy, which requires the backing of 75 per cent of those shareholders eligible to vote. Because shareholders owning 10 per cent of Vardy have already irrevocably accepted the Pendragon offer, they are not eligible to vote. This means Pendragon only needs the support of shareholders owning a further 5.7 per cent of Vardy to prevent the Lookers deal being approved. Although these shareholders would be rejecting an offer of 875p for one worth 800p, Pendragon argues they would benefit from the greater efficiency gains the bigger grouping could then achieve.

Shares in Lookers rose 18 per cent to 601p while Pendragon climbed 11 per cent to 536p. Vardy shares fell 6 per cent to 857.5p - 17.5p below the recommended offer price from Lookers.

Trevor Finn, the chief executive of Pendragon, denied he was seeking to "bounce" Lookers and Vardy into the three-way merger. He said Pendragon had chosen to go public with its offer so that shareholders in the other two companies knew what was on the table, the Lookers board having rebuffed it twice. Mr Finn has built Pendragon into the UK's biggest new car retailer with a series of deals, including the takeovers of CD Brammall in 2004 and Evans Halshaw in 2000.

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