June 24, 2020 / 11:44 AM / 18 days ago

Breakingviews - VW’s Europcar takeover would be a rough round trip

The logo of car rental company Europcar is seen outside Paris Charles de Gaulle airport in Roissy-en-France during the outbreak of the coronavirus disease (COVID-19) in France May 19, 2020.

LONDON (Reuters Breakingviews) - Bidding up shares in teetering car-rental companies is meant to be the preserve of credulous day traders. Volkswagen begs to disagree. The $80 billion German automaker is mulling the purchase of fraught Europcar Mobility. Boss Herbert Diess may have in mind using Europcar’s locales to offer ride-sharing. But plummeting rentals and high debt mean bumpy economic returns lie ahead.

If Diess does make an offer, it would mark a roughly 14-year round trip since VW sold the business to Paris-listed buyout fund Eurazeo for a princely 3.1 billion euros in 2006. Despite Eurazeo listing the business at an equity value of around 1.8 billion euros in 2015, the investment has been a disaster. Elevated leverage and an ultra-competitive market sent shares plummeting by two-thirds even before the Covid-19 lockdown pounded sales. Europcar continues to stagger under 1.4 billion euros of net debt, or over 4 times trailing earnings before interest, tax, depreciation and amortisation.

Diess is right in thinking the vehicle-rentals market will eventually bounce back. Moreover, combining with Europcar would allow VW to exploit its roughly 1,150 locations in European airports and city centres to offer growing mobility services such as ride-sharing and short-term rentals for ride-hailing companies such as Uber Technologies. It might also boost the profile of VW’s forthcoming ID3 battery car – which will go head-to-head with Tesla by introducing its showpiece electric model to more drivers.

Eurazeo, which holds 30% of Europcar, is looking for an exit. Still, even at a knackered price Diess would struggle for the deal to make financial sense. Assume VW offered shareholders 504 million euros, a 30% premium to Tuesday’s price. Including debt, that would give Europcar an enterprise value of 1.9 billion euros. Without any synergies on offer, analysts reckon Europcar is set to make earnings before interest and tax of 190 million euros in 2021, meaning Diess is staring at a mere 7% return, assuming a 31% tax rate. That’s below VW’s likely cost of capital. Shareholders may want to tap the brakes on Diess’s deal-doing.

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