Inchcape : Proposed Acquisition of Derco (363.31 KB)

THIS ANNOUNCEMENT AND THE INFORMATION HEREIN IS NOT FOR RELEASE, PUBLICATION OR DISTRIBUTION IN ANY JURISDICTION WHERE TO DO SO WOULD CONSTITUTE A VIOLATION OF THE RELEVANT LAWS OF SUCH JURISDICTION

THIS ANNOUNCEMENT INCLUDES INSIDE INFORMATION

28 July 2022

INCHCAPE PLC

PROPOSED ACQUISITION OF DERCO -

EXTENDING INCHCAPE'S GLOBAL LEADERSHIP IN AUTOMOTIVE DISTRIBUTION

Inchcape announces business combination with Derco, Latin America's largest independent automotive distributor

Inchcape PLC (the "Company" and together with its subsidiaries "Inchcape"), the leading independent multi-brand global automotive distributor, announces the signing of an agreement to implement a business combination to acquire Derco ("Derco Holdings" and together with its subsidiaries, "Derco"), the largest independent automotive distributor in Latin America, for a cash and share consideration valuing Derco at £1.3 billion1 on a debt and cash free basis (the "Transaction").

Derco is a family-ownedmulti-brand automotive distributor, and the largest independent distributor by volume in Latin America, with a strong track record of profitable growth. Derco has significant presence across four attractive markets of Chile, Peru, Colombia and Bolivia, and has long-standing partnerships with global automotive brands such as Suzuki, Mazda, Chevrolet, Changan, JAC, Renault, Great Wall and Haval.

Derco is led by an experienced management team with deep knowledge of the markets in which they operate, and on average 15 years of experience. This team will be a strong addition to Inchcape's fast-growing platform in the Americas.

STRATEGIC HIGHLIGHTS

• Brings together two leading automotive distributors in Latin America: Inchcape, with broad geographic reach and extensive brand representation, and Derco, the largest independent distributor by volume
• Significantly expands Inchcape's position in highly attractive and fast growth markets within Latin America
• Combines two best-in-class operators with complementary market footprints and OEM brand portfolios, providing significant opportunities for customers, OEMs and employees of the enlarged business
• Expected to deliver significant value creation through enhanced growth prospects and delivery of meaningful recurring synergies
• Derco is a well-managed company, strongly aligned culturally and strategically with Inchcape. The Del Río family (Derco's ultimate owners) will become a shareholder (9.3% stake) in Inchcape and will be entitled to nominate one director to the Inchcape Board following Completion

TERMS AND FUNDING OF THE DEAL

• The agreement is based on total consideration, including cash and shares, of approximately £1.3 billion on a debt free, cash free basis
• This values Derco at:

1. 5.5x FY2021A EBITDA2; and

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• 1. approximately 6x (pre-IFRS 16)3 based on normalised margins plus recurring synergies
• The transaction will be financed by Inchcape through
• 1. Utilising existing cash (approximately £400 million) on Inchcape's balance sheet;

1. New debt facilities of £600 million; and

1. Approximately 39 million of newly issued Inchcape Shares (the "Consideration Shares"), valued at approximately £280 million based on the Company's 20-day VWAP up to and including 26 July

FINANCIAL IMPACT

• The Transaction will result in a step-change in the size of Inchcape's Distribution business, adding £2.0 billion of distribution revenue. The addition of Derco to Inchcape's existing platform is expected to increase the weight of Distribution to approximately 75% of the enlarged group's revenue, with an enlarged Americas & Africa segment representing approximately 35% of the enlarged group's revenue.
• For FY 2021, Derco reported revenue of £2.0 billion and operating profit of £236 million4

1. Over the longer term, Derco has demonstrated revenue and profit growth, driven by new vehicle volume growth, underpinned by low motorisation rates, market share

gains, new contract wins and cost-discipline

1. More recently, in 2019 and 2020, Derco saw a decline in revenue and operating profit margins due to geopolitical volatility in its markets and the pandemic, mitigated in part by overhead efficiencies. This was followed by strong revenue recovery and elevated margins in 2021

1. Derco's performance in 2021 benefited from strong supply for many of its brands, coupled with pricing management and cost-control, which drove strong growth of profitability and margins

1. Derco has continued to deliver strong financial performance in FY 2022 YTD, with revenue over the last twelve months of £2.2 billion, driven by robust consumer demand in its markets

• 1. As of today, there is still significant pent-up demand for new vehicles. However, once the ongoing supply constraints are resolved and the supply-demand situation rebalances, the Company expects Derco to generate an operating margin towards the top-end of the range for a typical automotive distribution business (5-7%), before recurring synergies
• The Company expects that the Transaction will generate significant value for Shareholders, through enhanced growth prospects and delivery of meaningful synergies
• 1. The Inchcape Board expects the Transaction to deliver annualised pre-tax recurring synergies of at least £40 million, with the significant majority delivered by end of the second year following Completion. These primarily comprise organisational efficiencies, procurement savings, footprint optimisation and technology efficiencies

by leveraging Inchcape's global and regional infrastructure

1. There are also opportunities to drive significant revenue synergies by deploying Derco's commercial model to certain Inchcape brands, harnessing Inchcape's data and digital capabilities, and leveraging the expanded OEM relationships,

geographic footprint and best practices of both Derco and Inchcape

1. The Company expects that the realisation of recurring and revenue synergies will require one-off cash costs of up to £60 million in aggregate over two years

• 1. Furthermore, the Transaction is expected to accelerate growth and be margin accretive for Inchcape, even before the benefit of synergies
• As a result, the Transaction is expected to:

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1. be 15+% accretive to Inchcape's earnings per share (excluding implementation

costs) in the first full financial year following Completion, and 20+% accretive to earnings per share from the second year onwards as synergies are delivered

• 1. generate a Return on Invested Capital (ROIC) in excess of project cost of capital in the third full financial year following Completion
• Following Completion, Inchcape will retain a strong balance sheet with the Transaction expected to increase the Company's leverage to c. 0.6x Net Debt / EBITDA (pre-IFRS16), this is expected to reduce quickly given the highly cash generative nature of the business
• In light of the Transaction, the Company will not proceed with the second £50 million tranche of its FY22 £100 million share buyback programme
• The Company's dividend policy is unchanged, and it expects to continue to pay out 40% of its adjusted basic earnings per share

TIMETABLE

• The size of the Transaction means that it is classed as a Class 1 Transaction under the Listing Rules (the "Listing Rules") of the Financial Conduct Authority (the "FCA"). Accordingly, the Transaction is conditional upon, among other matters, the approval of Inchcape Shareholders
• The Transaction is also subject to merger control clearance in Chile and Peru and a merger control filing in Colombia
• The Company expects to publish a shareholder circular, including a notice of General Meeting (the "Circular") by late September or early October 2022. Subject to satisfaction of the conditions to the Transaction, Completion is expected to occur in late 2022 or early 2023
• The Inchcape Board intends to recommend in the Circular that Inchcape Shareholders vote in favour of the requisite shareholder resolution to approve the Transaction (the "Class 1 Resolution"). The directors of the Company intend to vote in favour of Class 1 Resolution in respect of their own beneficial holdings, which amount to approximately 0.1% of Inchcape's total issued ordinary share capital as at the date of this Announcement
• In a separate announcement, the Company has today reported its Interim results for the six months to 30 June 2022, reconfirming its financial outlook for the year

Duncan Tait, Chief Executive Officer, Inchcape, commented:

"The combination with Derco is a transformative and unique opportunity to accelerate our global distribution business. We believe it will deliver substantial shareholder value and is another great example of our Accelerate strategy in action.

Derco will dramatically increase our scale in the fast growth Americas region, bolstering our presence in several existing markets, and will secure Bolivia as a new Inchcape distribution market. Derco also brings a fantastic set of highly complementary OEM relationships, including deepening our decades- long relationship with Suzuki, and broadens our brand footprint in the region, with Mazda, Chevrolet, Changan, JAC, Renault, Great Wall, Haval, Citroen, DS and Joylong.

We have long admired Derco's business, and we are delighted to partner with the Del Río family. We are also excited about working with our talented new colleagues at Derco to continue to accelerate the growth of the enlarged Americas business. Together we will have extensive access to customer and vehicle data, which is at the heart of our strategy to capture a greater share of the vehicle lifecycle value.

As the leading independent automotive distributor globally, Inchcape will continue to drive sector consolidation in an industry primarily made up of regional and more local distributors and where the combination of digital capabilities, and data and consumer insights are ever more valuable."

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Romeo Lacerda, CEO Americas and Africa, Inchcape, commented:

"Derco is a great business with strong and long-established relationships with leading OEMs. It has a reputation for operational excellence and has been successful in expanding its distribution footprint in recent years.

Growing demand for new vehicles in Derco's highly attractive markets is underpinned by compelling long-term demographic and economic trends in Chile, Peru, Colombia, and Bolivia. These powerful market dynamics provide a long run-way of growth opportunities for our business.

Inchcape's scale and geographic diversification together with its track record for successful integration, engaging and retaining talent and market-leading digital and data capabilities provide a strong platform for continued profitable growth and superior value creation.

I am really looking forward to welcoming our new colleagues from Derco into Inchcape Americas."

Juan Pablo Del Río, Shareholder and member of the Board of Derco, added:

"Inchcape's track record of expansion across the Americas is impressive, and we have great respect for the business. Both companies enjoy a strong strategic and cultural fit, sharing the same values and commitment to deliver excellence for our OEM partners and consumers across our communities.

As well as its established reputation for distribution excellence, Inchcape is the undisputed leader in digital and data for automotive distribution across the Americas. This is an increasing area of focus for automotive OEMs, and is one of the reasons they are so supportive of our proposed combination.

I am excited by the combination with Inchcape, and the opportunities we have to further accelerate the growth in the Americas region, together with the continued support of our colleagues."

OVERVIEW OF INCHCAPE

Inchcape is the leading independent multi-brand global automotive distributor, operating in over 40 markets and territories with a portfolio of the world's leading automotive brands.

Inchcape entered the Americas in 1993, initially distributing BMW new vehicles and parts in Chile and Peru. The business has a fantastic track record of both organic and inorganic growth, catalysed by the acquisition of Indumotora in 2016, Grupo Rudelman in 2018, Mercedes-Benz distribution in 2020 and Ditec, Simpson Motors and ITC in 2022. Today, it distributes new vehicles and parts in more than 11 markets and territories across South and Central America, for OEMs including BMW, Mercedes- Benz and Daimler, Subaru, Suzuki, DFSK, Jaguar, Land Rover, Geely, and various commercial vehicle partners. Today, Americas is one of Inchcape's fastest growing regions due to low motorisation rates, which are expected to rise considerably as the economies continue to prosper.

OVERVIEW OF DERCO

Derco was founded in 1959 by Jose Luis Del Río Rondanelli and is today still almost exclusively owned by the Del Río family. It is the largest independent multi-brand automotive distributor by volume in Latin America operating more than 375 dealerships across Chile, Peru, Colombia and Bolivia. It has over 60 years of heritage in automotive distribution and has developed strong market positions in its markets - number one in Chile, Peru and Bolivia and number three in Colombia by volume - through a combination of both organic and inorganic growth. It has long standing distribution partnerships with Suzuki (since 1976) and Mazda (since 1982), and a track record of winning and introducing new

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brands into its markets: Chevrolet in 1999; Renault in 2000; Changan, Great Wall, JAC and Haval between 2006 and 2007; Citroen and DS in 2016; Joylong in 2020.

Derco distributes passenger vehicles to a network of customer-facing dealerships that are operated either directly by Derco (as a vertically integrated model), or by independent third-party dealers. The majority of dealership sites in Chile, Peru and Colombia operate under the DercoCenter brand (passenger vehicles), in which multiple brands are sold and serviced in a single integrated site. In Bolivia, where the business operates as ImCruz rather than Derco, these dealerships operate under the ImCruzCenter brand.

In addition, Derco engages in other businesses such as distribution of machinery and trucks, for brands such as JAC, Mack and Fuso, and an aftermarket spare parts and accessories business.

INVESTOR AND ANALYST WEBCAST

A virtual presentation for investors and analysts will be held today, Thursday 28th July 2022 at 08:30AM BST, in conjunction with Inchcape's interim results. The slides accompanying the presentation will be available on Inchcape's website shortly after the conclusion of the webcast.

The preceding summary should be read in conjunction with the full text of the following Announcement, including its appendices. The defined terms set out in Appendix II apply to this Announcement.

Enquiries:
Inchcape plc - Investor Relations
Raghav Gupta-Chaudhary	[phone]
	[e-mail]
Brunswick Group - Media Enquiries
Susan Gilchrist, Kate Holgate	[phone]
	[e-mail]
Greenhill - Financial Adviser and Sponsor
Charles Gournay, Dean Rodrigues	[phone]
J.P. Morgan Cazenove - Financial Adviser and Joint Corporate Broker
Nicholas Hall, Ameya Velhankar	[phone]
Jefferies International - Financial Adviser and Joint Corporate Broker
Ed Matthews, Philip Noblet	[phone]

Important notices

This Announcement contains inside information for the purposes of Article 7 of the Market Abuse Regulation (EU) 596/2014 as it forms part of UK domestic law by virtue of the European Union

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