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The one bump in the road toward the proposed merger of two of Australia's largest automotive groups has been more or less flattened following this morning's announcement from AP Eagers (ASX: APE).
The 106-year-old company has announced it will divest its Newcastle and Hunter Valley based car dealer Kloster Motor Group for $54 million to appease the Australian Competition and Consumer Commission ('ACCC').
In late June the ACCC said AP Eagers' Newcastle operations were raising red flags, noting that a merger of AP Eagers and Automotive Holdings Group (ASX: AHG) could have an adverse impact on competition in the region.
"A combined AP Eagers and AHG would operate 46 per cent of new car dealership sites in the Newcastle/Hunter Valley region, including those for the ten most popular brands, and runs 54 per cent of the dealership sites selling those brands," said ACCC acting chair Delia Rickard at the time.
"In metropolitan Newcastle alone, the combined company would operate 77 per cent of dealership sites selling the ten most popular brands."
This morning, AP Eagers has announced its intention to divest the thorn in its side: Kloster Motor Group an 85-year-old automotive retailer based in Newcastle and the Hunter Valley which has been owned by AP Eagers since 2007.
The business employs 410 people and generates approximately $420 million in annual revenue.
Kloster has a diverse portfolio of nine major vehicle brands including BMW, Ford, Honda, Hyundai, MINI, Mitsubishi, Nissan, Suzuki, and Volkswagen and operates dealerships in Newcastle, Cardiff and Maitland.
The company says the divestment of the group should appease the regulator.
"Whilst AP Eagers believes its merger with AHG will not substantially lessen competition in any market, it will offer the proposed undertaking to divest its dealerships in Newcastle and the Hunter Valley to address the regulator's preliminary concerns so it can proceed with the merger in a timely manner," says AP Eagers.
The parent company has entered into a deal with the Tony White Group for the sale of Kloster for $54 million.
The sale of Kloster is expected to complete in November 2019, subject to satisfactory due diligence, completion of formal transaction documentation, manufacturer approval and ACCC authorisation of the merger with AHG.
If the deal goes through the merged group of two of Australia's largest automotive dealers will have a market capitalisation of $2.3 billion, and existing AHG shareholders would own 25.5 per cent of the new entity.
AP Eagers has previously indicated that a merger of the two companies could result in the merged entity looking at new business angles like ride sharing and subscription services.
Shares in AP Eagers are up 2.39 per cent to $9.41 per share at 10.19am AEST.
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