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EquityFollow-ons and Rights issues

ALD wants to take on the captives after successful rights issue

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Merger with Leaseplan will increase funding needs, bring higher rating

ALD Automotive’s €1.2bn rights issue is expected to conclude on Friday with a strong take-up from investors, the company’s CEO has told GlobalCapital. The deal, to fund the takeover of Dutch rival Leaseplan, will position ALD as a rival to the captive finance arms of car manufacturers and will help to grow its electric fleet.

The car leasing business of French bank Société Générale is due to price its rights issue in the coming days, to finance the cash component of its €4.9bn takeover of Leaseplan. The merger, which received regulatory approval from the European Commission subject to asset sales in certain EU countries, is now expected to close in the first quarter of next year.

It will create one of the largest car leasing fleets in the world, with more than 3.3m vehicles, almost a third of which will be electric.

“Investors like the equity story,” said Tim Albertsen, CEO of ALD in Paris, in an interview with GlobalCapital. “They believe that the new ALD will be very well positioned to capture that growth and turn our scale and efficiency into some nice sustainable returns. They also see a nice sustainability angle too, as we talk about electrification and helping our customers drive down their carbon dioxide emissions to net zero by 2030 through electrification, but also through other means.”

New customers

ALD has traditionally focused on leasing car fleets to companies, but it sees opportunities in working with small businesses and individuals, which would put it up against competitors such as Volkswagen’s leasing arm, one of the dominant players in the industry.

“The new ALD is an absolute leader in our current space, but we are also looking forward to the consumer space, where we want to be a major player as well,” said Albertsen. “We will be meeting more of the captives of the manufacturers as competition, and we think we are well positioned with the scale, which helps a lot. Secondly, our funding capacity will be very strong, especially compared with the captives, with a new rating of A- and strong support from Société Générale.”

At the moment, ALD is rated BBB by S&P, Leaseplan BBB-. That compares with an A- rating for BNP Paribas-backed Arval and Volkswagen Financial Services, which is rated A3/BBB+. VWFS includes a banking entity rated A1/BBB+.

By buying Leaseplan, ALD will also acquire a regulated bank, which takes deposits in Germany and the Netherlands.

“There are a lot of positives around this,” Albertsen said. “In terms of our capacity to compete against the banks of the manufacturers — obviously maybe not Volkswagen Group, which is a very strong bank as well, but most of the captives are rated in the B category and we will be in the A category. We will have a variety of funding sources including strong support from Société Générale, which gives us a strong competitive edge.”

Greater scale will give the new ALD more pricing power with car manufacturers, allowing it to offer more competitive pricing to clients.

“Scale is very important in terms of our capacity to manage costs,” added Albertsen. “We had been discussing for quite some [time with] shareholders on this deal. The first time, four years ago, it was all about scale, and it was already an appealing story at that point in terms of cost versus income. Today the deal has become much more strategic, as the mobility sector is transforming very fast. We are looking at a market that is much bigger than the market we are in today and competition will change quite dramatically.”

Greening the fleet

At a time of rising inflation, higher borrowing costs and a looming recession in many of ALD’s key markets, the car leasing business has proved resilient. ALD’s share price has fallen 7.9% this year, giving it a market capitalisation of €6.2bn, and the share trades on a dividend yield of about 9%.

In the first nine months of 2022, ALD made record net income of €918m, up 51% from the same period in 2021.

The company has suffered disruption from problems in the supply chains of car manufacturers, which delayed it receiving deliveries.

But the same upheaval has pushed up demand for second-hand cars, raising ALD’s margins on disposals.

At the front and centre of ALD’s plans for growth once it buys Leaseplan is electrifying its fleet over the next eight years.

“Today, if you are an investor, you want to invest in something which is instrumental in driving down CO2 emissions or being environmentally friendly,” said Albertsen. “It is an important thing for the people we want to work for us. People want to work for a company that is doing something. We have an obligation to help our customers drive down their CO2 emissions, and we see that from our clients. Most of them have a very strong ESG agenda.”

Around 27% of ALD’s new deliveries this year were electric or hybrid vehicles — which, it says, is above the European average of 22%.

ALD has a target of 30% of EVs in its fleet by 2025 and 50% by 2030. The first target has already almost been hit.

It expects to set a new target for 2030 once the Leaseplan merger has been completed. ALD already has extensive partnerships with electric vehicle makers such as Tesla and Polestar.

ALD issued a green bond in June and expects to return to debt capital markets with more green deals next year as it continues its electrification path, aided by the positive impact of Leaseplan’s bank.

“We are leveraging our green assets to get funding through bonds or other means, such as securitization,” said Gilles Momper, CFO of ALD. “We will have much more funding needs than before and it is a global trend for the leasing industry, as the investment value of these cars is much higher than the diesel and petrol vehicles. Funding will be the challenge, as we have already seen, so we will of course be a more frequent bond issuer, leveraging our green assets.

“We will be keeping Leaseplan Bank, which collects deposits in Germany and the Netherlands. The Société Générale funding will remain on a lower portion, and we will continue to leverage on the Leaseplan Bank.”

Done, for now

A large merger had been expected ever since ALD was separately listed from Société Générale in a €1.16bn IPO in June 2017. That gave ALD a currency for acquisitions independent from its parent.

Leaseplan also pursued an IPO in October 2018 but the deal was cancelled. The company blamed poor market conditions. That led to Leaseplan’s shareholders pursuing a merger with Paris-listed ALD instead, as an alternative route to the public equity market.

ALD expects to spend much of the next 12 months integrating Leaseplan into its business. Given the size of the deal, the potential for further consolidation in the industry is limited, although ALD has not ruled out pursuing further bolt-on acquisitions for growth further down the line.

In October last year, ALD signed a deal to acquire Fleetpool, the German digital car subscriptions company. Away from its core European markets, ALD is also targeting expansion in southeast Asia, having opened in Malaysia and aiming to open in Thailand. Leaseplan has a subsidiary in the United Arab Emirates, where it sees a lot of growth potential.

“What we have ahead of us is quite a severe integration process,” said Albertsen. “It is going to take at least 18-24 months before we get to the end of that. In the past we have done a lot of acquisitions. We have done at least one bolt-on acquisition every year, but now the full focus will be the integration, so we do not expect to participate in any further consolidation until we are a bit further down the road and the integration is on track.

“Having said that, you will probably see us again if there are interesting opportunities. There is not a lot of consolidation that can happen at the top now, if you look at the space.”

The €1.2bn rights issue is ALD’s first foray into equity capital markets since its listing, and although it is unlikely to return for more capital any time soon, further secondary block trades are likely as Leaseplan’s financial shareholders seek to monetise their investments over time, especially if the company performs well once the deal closes.

Leaseplan is owned by an investor consortium that includes GIC, the Singaporean sovereign wealth fund, the private equity arm of Goldman Sachs, TDR Capital, Ardian and the Abu Dhabi Investment Authority.

Under the terms of the merger, Leaseplan’s owners will receive a 32.9% stake in ALD upfront. There are also warrants, which are convertible one to three years after completion, if ALD's stock rises by at least 30%.

If the warrants are exercised, in additional to the issuance of new shares to Leaseplan's owners, Société Générale, which currently owns 79.8% of ALD, may be diluted down to just over 51%. SG sold a portion of its subscription rights in a placing last week.

“This is a growth story, at the end of the day, and there are not many of those stories out there these days,” Albertsen said. “There will be structural growth coming our way for the next five years.”