What has M&A activity for your clients in the automotive industry looked like over the past couple of years?
M&A activity in the Canadian automotive sector in 2023 experienced slowdown, primarily due to global political unrest and economic uncertainty. However, with some recovery from the supply chain disruptions and discussions of projected interest rate cuts, other opportunities have emerged and there is optimism for rebound. One enduring constant has been the trend of dealership consolidation. Additionally, as anticipated, we saw a rise in transactions driven by global and Canadian commitments to electrification policies. This included transactions aimed at securing access to technological innovations and electronic vehicle materials to enhance future business competitiveness. Despite decelerated demand in electronic vehicles, technology-driven deals remain robust and are creating new opportunities with continued interest in areas of innovation, supply-chain resilience and vertical integration.
With the forms of hybrid power continuing to evolve, how do you see that impacting electronic vehicle infrastructure?
The automotive industry is strategically responding to growing consumer concerns over affordability, driving a preference for hybrid vehicles that are now surpassing electronic vehicle sales. This has encouraged investment in hybrid technology even as Canadian policies continue to prioritize the expansion of electronic vehicle infrastructure. These technological advancements include extending electric-only ranges, implementing intelligent energy management systems and hybrids that do not require plug-in infrastructures. Hybrids are currently serving as a crucial transitional compromise, balancing consumer demand while supporting the long-term goal of greener transportation. In the future we may see that hybrid technology provides a commercially superior solution to the debate between internal combustion engines and complete electronic vehicles, but only time will tell. Although the trajectory of an electronic vehicle oriented future steadily continues to grow, the pace has evidently slowed and the shift in focus towards hybrid technology suggests a potential delay in electronic vehicle development and infrastructure.
Given the era of the Boomer Generation retiring, how do you see this impacting the automotive industry?
As the Boomer Generation enters into retirement, following decades of building their dealership businesses, many are looking to exit now. Furthermore, the pressures of the COVID-19 pandemic and economic uncertainty have reinforced this inclination. Many Boomers have shifted priorities to focus on family wealth legacy rather than continued business ownership. The nature of dealership operations have also evolved. They are now driven by technology as well as data-centric marketing strategies and decision-making, resulting in traditional, relationship-based business models to be less efficient. Naturally, the automotive industry is facing increased consolidation with smaller, family-owned dealerships being acquired by larger, more capitalized businesses. Transactions in the past 2 years with Canadian targets have been focused on acquiring local dealerships. This is also evident in the US where Q1 2024 has seen the highest volume of dealership acquisitions in the past four years.
Do you see transaction liability insurance in M&A transactions in the automotive industry being leveraged and if so, how can it be useful?
Representations and Warranties Insurance is valuable for flexibility in de-risking and facilitating negotiations in M&A transactions of the automotive sector. In hybrid asset and share sale/purchase transactions, this insurance allows for larger real estate portfolios to be captured without having the value of the real estate determine the policy limit.
Obtaining this insurance also offers the opportunity to decrease the sellers exposure to large and lengthy escrow arrangements, while providing purchasers with appropriate coverage for risks tailored to this class of asset. That said, policy exclusions tend to be adapted to areas which may be more relevant to these types of operations, such as employee matters and the condition of physical assets. Lastly, this type of policy coverage and its premium costs are well-suited to parties completing M&A transactions involving dealership assets.
With the increased capital gains inclusion rate, how do you see this affecting M&A transactions in the automotive industry?
As of today, new capital gains tax changes in Canada have increased the taxable portion from 50% to 66.67% for individuals with net capital gains exceeding $250,000 annually, as well as for corporations and most types of trusts. With this change also came the proposed increase of the Lifetime Capital Gains Exemption in Canada to $1,250,000.
The 2024 federal budget changes triggered a race to complete M&A transactions that were well-advanced, or to finalize corporate reorganizations to preserve the previous tax regime prior to the June 25th deadline. Moving forward, buyers and sellers alike are adjusting to the new budgetary landscape, and we anticipate more hybrid deals of asset and share purchases within the automotive sector as players aim to optimize tax outcomes. More contemplated and effective tax planning on M&A transactions will be required by both parties to optimize the transaction process and outcome.
