Description

This is a fairly simple situation- Pendragon has sold its UK car dealer and leasing businesses to Lithia Motors (LAD). The remaining business is Pendragon’s dealer management software (DMS) segment, Pinewood Technologies.

In Q1/Q2, the company is paying out a dividend of 24.5p with the proceeds from the sale, which leaves a stub value of 8.5p. The stub will have ~20 million GBP of net cash following a 30 million GBP share issuance to LAD. That puts the stub’s EV at around ~130 million GBP, or 8x Pinewood’s TTM EBITDA.

8x trailing EBITDA (w/ no stock comp add-backs btw…) for sticky recurring revenue is a low multiple in absolute terms, and comps CDK and CDK International were sold for 13.3x and 15x respectively. LAD will own ~16% of shares and is rolling the software out to its own UK dealerships. It has secured verbal commitments from other major dealers in the UK to switch to Pinewood’s software. At ~15x, the whole thing would be worth ~0.39, or 20% higher than today’s price with 75% of the initial investment to be returned within the next few months via dividend.

For a quick primer on the DMS business, I would check out the VIC write ups on CDK. DMS is essentially a vertical specific ERP for car dealers. Like all ERPs, it’s relatively disruptive/risky to change and switching is infrequent. The market is saturated and so growth for DMS providers primarily comes from M&A and price increases. In the UK, Pinewood’s home market, Keyloop (formerly CDK international) has ~60% market share, Pinewood has ~20% share, and Reynolds and Reynolds has ~10% share. Pinewood is the value player in the market, providing an integrated suite of modules (CRM, AR/AP, parts, finance etc.) whereas Keyloop is more expensive and has integrations with specialized third party providers of different modules.

The deal with LAD is going to be a game changer for Pinewood in a couple of ways. The public stub is going to be a very small company with ~$16 million of EBITDA. Standalone overhead is going to run an additional ~2.5 million GBP. But as part of the deal, LAD will be putting its dealerships onto Pinewood’s DMS. This is 2,500 new users (compared to an existing user base of 32,800) which will generate an incremental 2-2.5 million GBP operating income, largely offsetting the incremental overhead. Pinewood’s EBITDA margins are a lot higher than comps and so might be unsustainable. I believe a lot of the difference is due to a much smaller sales organization.

When Pinewood was previously captive to a dealer group, other dealers were reluctant to use the product and aid a competitor. This changes (somewhat) as Pinewood is now (somewhat) independent. LAD is acting as an outsourced sales org and claims it has secured verbal commitments for an additional 7,500 users from 3 of the top 10 UK dealer groups. They also have talked about another top 10 group that’s likely to be joining as well (my reading of what LAD said on their most recent conf call is that this isn’t included in the 7,500 they put into their press release). 7,500 users at 100/month/user and 60% EBITDA margins implies a 30% growth opportunity.

Verbal agreements are just verbal agreements, but at least a couple of the larger dealer groups are unhappy with Keyloop and would like to leave because of customer service issues following Keyloop’s acquisition by PE and subsequent outsourcing to India. Keyloop has also lost a key sales executive who’s now consulting for Pinewood. My understanding is that DMS licensing agreements are multi-year so the timing of how this will all go down is unclear to me (LAD claims to be switching to Pinewood with 12mo of deal close), but it’s a new growth opportunity for a business that has historically been sleepy and helps justify a higher multiple than 8x trailing EBITDA. In addition to the 7,500+ potential new users in the UK, Pinewood thinks it can grow another 10,000 users in Europe, Middle East, APAC, and Africa by the end of 2027.

Lastly, Pinewood and LAD are each contributing 10 million GBP to help develop Pinewood for the US market. This is a longer-term 3-5 year type opportunity, but a compelling one in that LAD spends $65 million+ on its DMS. Cutting that cost in half and capitalizing the other half at a SaaS multiple is potentially attractive to LAD, a company that traditionally makes low single digit EBIT margins.

So just to sum it up here, I think Pinewood has changed from a sleepy, under-managed, captive SaaS product to a focused company aided by a large partner that’s bringing a material number of new customers to their doorstep . The stub is optically cheap regardless of growth, and hey, if I’m wrong and it trades like trash or margins collapse, at least you’ll get 75% of your investment back in short order.

Catalyst

Jan 31 deal close