(Bloomberg Opinion) -- It’s a sign of just how rapidly the fortunes of the car-rental industry have improved that Europcar Mobility Group felt comfortable rejecting a 2.2 billion-euro ($2.6 billion) takeover bid from Volkswagen AG, saying it failed to “reflect the company’s full value and value creation potential.” Details of that spurned offer were first reported by Bloomberg News.
Just a few months ago, Europe’s largest car-rental operator was forced to file for Chapter 15 bankruptcy protection. When the pandemic brought travel to a halt, the French group’s revenues plunged more than 40% last year and its debts became unsustainable.
Europcar is now majority-owned by a group of hedge funds that cannily snapped up its bonds last year when they were selling for as little as 40 cents on the euro. More than 1 billion euros of those debts were converted into equity as part of a financial restructuring completed in February. The new owners, who include Anchorage Capital Group, Attestor Ltd. and King Street Capital Management LP, also injected more cash.
Their bet that Europcar’s prospects would rapidly improve now looks astute. With lockdown restrictions lifting just in time for summer, car rental is picking up. And a lack of cars across the industry means rates are surging. Like rivals, Europcar slashed its vehicle fleets by more than one-third last year and replacing those vehicles has become more difficult due to semiconductor shortages.
These tight market conditions have made rental car operators a hot property and there aren’t many big companies left to buy. The European market is dominated by just five companies.
Only Volkswagen has reason to be regret this rapid turnaround. It first toyed with buying Europcar last summer when the French company’s market capitalization was a fraction of what it is now. Its reasons for prizing Europcar look to be more strategic than financial.
The industry is gradually shifting away from a pure ownership model to one that embraces car-sharing, ride-hailing and vehicle subscription. Autonomous vehicles will eventually accelerate this transition. That all makes Europcar’s fleet-management expertise and rental infrastructure quite attractive.
VW’s bidding consortium reportedly includes Attestor and Dutch transport conglomerate Pon Holdings BV. If they’re to succeed, they may have to dig deeper than the modest 12% share-price premium offered so far — Europcar isn’t ruling out further discussions. The other hedge funds shouldn’t be too greedy though. While Europcar has cut costs and is now on a surer financial footing, it’s continued to burn cash.
Can Europcar elicit excitement similar to the sudden interest for Hertz after it filed for Chapter 11 bankruptcy last year? On that occasion hedge funds, along with retail investors who alighted on Hertz as the original memestock, spotted the equity might be worth something rather than being wiped out as usually happens in such situations.
They were proved right when Knighthead Capital Management, Certares Management and Apollo Capital Management struck a $7 billion deal to acquire Hertz last month.
Avis Budget Group Inc. avoided having to restructure its debts but hedge funds are involved there too. Avis’s biggest shareholder is SRS Investment Management LLC. The rip-roaring stock has gained more than tenfold since a March 2020 low, a performance Europcar would doubtless like to emulate.
Following an initial rebound, Europcar’s heavily diluted shares have gone sideways in recent weeks. The European travel market has been slower to recover than the U.S. The car rental market here is more competitive and operators don't enjoy the same benefits as their American peers from soaring second-hand vehicle prices. S&P Global Ratings warned in April that Europcar “must achieve very material revenue recovery to comfortably cover its fixed cost base.”
Money isn’t the only thing for Europcar’s board to consider here. It still has a 220 million-euro loan guaranteed by the French state, so it will need to tread carefully. A sale to Volkswagen would secure the company’s future and the German giant is a known quantity. It supplies a big chunk of Europcar’s vehicles and has owned the rental car firm once before. Just don’t expect the hedge funds to give up their prize easily.
Europcar favors buyback agreements. Most of its vehicles can be returned to the manufacturer, rather than having to sell them itself. That's very helpful when used car prices crater, less so when they soar as they've done recently.
VW took full control of Europcar in 1999 before selling it to private equity group Eurazeo in 2006.
This column does not necessarily reflect the opinion of the editorial board or Bloomberg LP and its owners.
Chris Bryant is a Bloomberg Opinion columnist covering industrial companies. He previously worked for the Financial Times.
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