How SocGen Plans to Squeeze Cash Out of Cars: QuickTake Q&ABy
Societe Generale SA has a plan to cash in on one if its most profitable businesses, and it isn’t banking. The French lender intends to raise as much as 1.6 billion euros ($1.8 billion) through the initial public offering of its ALD auto-leasing unit in Paris. ALD, which leases fleets of vehicles to companies and other clients, manages about 1.4 million cars in 41 countries. Its importance to Societe Generale -- a leader in equity derivatives -- shows how European lenders are looking outside traditional banking as tougher capital rules and low interest rates sap returns.
1. Why do an IPO?
Auto leasing is a business that benefits from economies of scale, and the share offering will allow ALD more flexibility to grab opportunities for growth, including acquisitions. The firm is looking to expand its fleet by as much 10 percent annually over the next three years. It may also be a good moment. Investor appetite has lifted Europe’s Stoxx 600 Index 8.6 percent this year.
2. Is leasing cars really more profitable than banking?
ALD had a return on equity of 34 percent in the first half of 2016, more than twice the level at Societe Generale’s global markets and French consumer-banking divisions. It accounted for almost 9 percent of the bank’s profit in the period while using relatively little capital. The unit’s return on equity -- a measure of how much profit is generated with shareholder funds -- is forecast to remain at more than 20 percent in coming years.
3. How much is ALD worth?
Societe Generale plans to sell up to 23 percent of ALD, or 92.9 million shares, for as much as 17.40 euros apiece. That would value the auto-leasing company at about 7 billion euros. The sale, Europe’s second-largest IPO of the year, runs until June 15. The offering will boost Societe Generale’s key capital ratio by as much as 0.2 percentage point.
4. How did SocGen get into this business?
The French lender stepped up its expansion into auto leasing in the early 2000s, after losing the takeover battle for Paribas SA to Banque Nationale de Paris SA. Casting about for paths to growth, it bought units of Deutsche Bank AG and Hertz Global Holdings Inc. in Germany, the U.K. and elsewhere. In May of last year, Societe Generale spent 300 million euros to swallow one of France’s top-10 fleet managers from private-equity firm Wendel SA.
5. How does ALD make money?
Fleet managers generate revenue from lease payments, service contracts and the resale of the cars after the leases expire, so the level of interest rates and resale values are important for their results. European car sales rose to the highest level since 2007 last year, but further gains are likely to be slower, according to analysts.
6. What are the risks?
One is tough competition. In Europe, big rivals include Volkswagen AG’s car-financing unit and LeasePlan. The industry has been consolidating in recent years, with BNP Paribas SA acquiring General Electric Capital Co.’s European fleet manager for 1.3 billion euros in 2015. Banco Santander SA in 2014 started a joint-venture with PSA Group, maker of Peugeot and Citroen, in 11 countries. But there’s another: The main financial risk comes from poorly valuing the stock of used cars. Late last year, Hertz replaced its CEO, said earnings would fall short and its stock plunged after it failed to adequately price its fleet.
The Reference Shelf
- A look at how SocGen’s returns from car leasing dwarf banking.
- A QuickTake on the the fight over bank capital requirements.
- A Bloomberg article on the problems at Hertz.
— With assistance by Chris Reiter