Volkswagen makes timid bet on brave new car world - Reuters

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The Europcar logo is seen in Merignac, France, April 17, 2019. REUTERS/Regis Duvignau

LONDON, July 29 (Reuters Breakingviews) - Volkswagen (VOWG_p.DE) is making a timid bet on an optimistic future for cars. A group led by the German automaker on Thursday unveiled a deal to take control of Europcar Mobility (EUCAR.PA) for 2.9 billion euros, including debt. But keeping the rental company at arm’s length suggests VW’s vision is tempered with caution.

Reversing into the car rental business is a trip down the auto industry’s memory lane. U.S. carmaker Ford Motor (F.N) owned Hertz until 2005. Europcar was a VW subsidiary until 2006, when the German group sold it to French buyout fund Eurazeo (EURA.PA) for roughly 3 billion euros. Hefty borrowings and a pandemic-induced business crunch forced the company into a recapitalisation last year.

The takeover is part of VW Chief Executive Herbert Diess’s plan to turn the $150 billion company into a tech-enabled provider of “mobility services”, a market he reckons will grow 10-fold to $100 billion globally by 2030. As younger drivers eschew car ownership, they are more likely to opt for alternatives like ride-sharing and monthly subscriptions. Further out, passengers will order driverless “robotaxis” whizzing around city centres with a swipe on a mobility app.

Europcar’s 3,500 sites in 140 countries should help. Their proximity to airports and city centres will enable VW to meet demand from customers and better manage its fleet of autonomous vehicles.

That distant prospect does little for the deal’s financial logic, though. Analysts reckon Europcar will make an operating profit of 183 million euros in 2022. Without the benefit of any cost savings, Diess and his co-investors are driving towards a mere 5% return on invested capital, assuming a 20% tax rate. That’s below Europcar’s estimated 8% cost of capital. Only a steeper-than-expected recovery in post-pandemic car rentals will rev up returns.

The hesitant bet is at odds with Diess’s sweeping vision. Although VW will own a majority stake, it will not control Europcar nor consolidate the company into the broader VW group. Indeed, Diess stressed that future transactions between VW and Europcar would take place at an “arms’ length” basis. As big journeys go, it’s an oddly nervous start.

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CONTEXT NEWS

- Volkswagen said on July 28 that a consortium it is leading had agreed to launch a tender offer for Europcar Mobility that values the car rental company at 2.9 billion euros including debt.

- The German carmaker, which has teamed up with asset manager Attestor and Dutch mobility group Pon for the deal, is proposing an offer price of 0.50 euros per share. That represents a 27% premium to the closing share price of 0.39 euros on June 22, the last day before the consortium’s approach to Europcar became public.

- The offer could be topped up by a supplement of 1 euro cent per share if 90% of shareholders take up the bid, Europcar said, adding that its board had recommended the offer.

- VW is betting on Europcar’s international network in more than 140 countries, including a fleet of over 350,000 vehicles, as a way to sell mobility services.

- “The mobility market is changing rapidly as customers increasingly demand new and innovative on-demand mobility solutions, such as subscription and sharing models to complement car ownership,” VW Chief Executive Herbert Diess said.

- “Europcar provides advanced fleet management capabilities as well as a broad network of stations at major airports, railway stations and city locations and will help accelerate Volkswagen’s delivery of its ambitious mobility services targets.”

- VW added that, although it will have a majority shareholding in the company, “it will neither control the consortium nor Europcar”.

- Europcar shares were up 2% at 0.495 euros by 0800 GMT on July 28. VW shares were down 0.2% at 203 euros.

Editing by Peter Thal Larsen and Oliver Taslic

Reuters Breakingviews is the world's leading source of agenda-setting financial insight. As the Reuters brand for financial commentary, we dissect the big business and economic stories as they break around the world every day. A global team of about 30 correspondents in New York, London, Hong Kong and other major cities provides expert analysis in real time.

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