M&A

Rental agreement

Carmaker reliant on Mercedes sales diversifies into car hire business

Ucar-w

Sold car rental stake to BAIC

As it headed towards its filing for chapter 11-bankruptcy in May, Hertz must have rued the fact that there was no white knight to save it from its Covid-19 induced collapse. A Chinese counterpart of the American car rental firm has, so far, been luckier in finding a rescuer.

At the end of the same month, state-owned BAIC Motor swooped in with an offer to purchase just over a fifth of CAR Inc from its parent UCAR. BAIC becomes its second biggest shareholder, behind Legend Holdings.

Like Hertz, CAR Inc is lossmaking. The sale also comes at a time when other businesses linked to UCAR’s founder Charles Lu Zhengyao have run into serious problems, following a fraud investigation at his best-known creation, Luckin Coffee.

Hertz and CAR Inc were once more closely linked. In 2013, Hertz purchased a 16.1% pre-IPO stake in CAR Inc, hoping to tap into a new era of car rental in China. It never quite worked out as planned and Hertz sold most of its stake without much of a profit in 2016, after CARInc was listed in Hong Kong.

Many now wonder if BAIC is making a similar mistake in investing in CAR Inc.

The deal “may end up being a sink for BAIC”, Bloomberg reckons, pointing out that the change of control could trigger immediate repayment of the car rental firm’s outstanding bonds.

At the end of the first quarter, CAR Inc reported $3.49 billion in outstanding short-term debt and $6.7 billion in long-term debt, of which $882 million was international bonds, according to S&P Global Market Intelligence data. CAR Inc had spent the second half of 2019 boosting its cash reserves, mostly by freezing fleet expansion and selling off some of its older cars in the face of an industry downturn.

At the end of last year, it had built up $5.36 billion in cash, although this had dropped to $3.3 billion by the first quarter.

More problematic is the complicated relationship between CAR Inc, UCAR and BAIC. UCAR is another of Charles Lu’s creation, this time in ride-hailing and auto finance. In early 2019, it purchased a 67% stake in German SUV brand Borgward from one of BAIC’s offshoots, BAIC Foton. The Chinese press has been trying to unpick the deal, which included commitments to repaying an estimated Rmb4.07 billion ($580 million) in loans back to BAIC within three years.

It remains unclear where UCAR will find the money, unless the estimated HK$999 million ($129 million) proceeds from the stake in CAR Inc are heading straight back in BAIC’s direction.

BAIC’s share price has responded well to the news of the CAR Inc deal, rising 15% since the transaction was announced. It has long wanted to broaden its focus from manufacturing vehicles, hoping to create a more diverse company that embraces car rentals and travel.

BAIC reported an Rmb4 billion ($564.9 million) net profit in 2019, which looks healthy at first glance. But dig a little deeper and all the gain came from its Mercedes-Benz joint venture, which posted a Rmb10.7 billion profit. BAIC’s proprietary brands lost Rmb6.3 billion and its Hyundai joint venture was also in the red, thanks to the downturn in car sales.

Daimler, the owner of the Mercedes brand, has signalled that it would like to take majority control of its Chinese JV, following in the footsteps of Volkswagen and BMW. BAIC is understandably reluctant to lose its crown jewel. Late last year, it was even reported that BAIC had been trying to buy a 10% stake in the German group so that it could form a potential alliance with Geely, which owns a similar stake in Daimler itself. Nothing has come of the speculation so far. But if it came off, the move could give the Chinese shareholders more chance to influence decisionmaking at the German carmaking giant.


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