Shares in Pendragon (PDG) sped 25% higher to 23.1p after the small cap car retailer struck a deal that can only be described as a takeover with a twist.

Rather than being bought in its entirety, Pendragon is selling its UK motor retail and leasing operation to North American player Lithia (LAD:NYSE), together with offloading all debt and pension liabilities.

The deal will leave Pendragon, whose deep value attractions Shares highlighted in March, as a debt-free pure-play technology company focused on a car dealer management software platform with compelling growth prospects.

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PINEWOOD PROSPECTS ENHANCED

Following an extensive strategic review, the Nottingham-based automotive retailer behind the Stratstone, Evans Halshaw and Car Store brands has agreed to sell its entire UK motor business and leasing business to Lithia Motors.

One of North America’s largest automotive retailers, Lithia is paying a total cash consideration of £280 million, which includes a £30 million investment in Pendragon for a 16.7% stake.

The deal includes a strategic partnership between the two companies focused on the rollout of Pinewood Technologies, Pendragon’s cloud-based DMS (dealer management software) business, to Lithia’s existing 50 UK sites and the creation of a joint venture to accelerate Pinewood’s entry into a ‘highly attractive’ North American DMS market worth more than £2.6 billion per year.

The Pinewood division will become a standalone entity, retaining Pendragon’s existing London Stock Exchange listing, in a deal creating a pure-play Software as a Service or ‘SaaS’ business with an accelerated growth plan led by Pendragon CEO Bill Berman.

Pendragon said the innovative transaction represents ‘the value-maximising conclusion’ of the strategic review announced last year and plans to return roughly £240 million to shareholders by way of a 16.5p cash dividend, after costs and investment in the strategic partnership.

WHY BERMAN IS BULLISH

Berman said Pendragon has built ‘one of the UK’s leading automotive retailing businesses, underpinned by a market leading dealer management system, the quality of our people, long-standing relationships with OEMs (original equipment manufacturers) and excellent execution for customers. The Pendragon board considers Lithia to be perfectly placed to build on this progress.’

He insisted the launch of Pinewood as a standalone company is ‘a unique and exciting opportunity to create a best-in-class product for customers, which we can market globally and drive substantial value for our shareholders and in Lithia we have the perfect partner to help accelerate Pinewood’s push into the hugely attractive North American DMS market.’

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