SocGen Is Betting $5.5 Billion That You Don’t Want to Own Your Car

(Bloomberg Opinion) -- In the future, most of us won't own our cars. We'll rent them, and the choice will be between doing that over hours, months or years. That's a big part of the logic of Société Générale SA's latest investment in growing its car-leasing arm, ALD SA.

The French bank has struck a long-rumored deal for its majority-owned ALD to buy European rival LeasePlan for 4.9 billion euros ($5.5 billion) from its private-equity owners, led by TDR Capital.

If SocGen is right, then it has found a cheap deal for a long-term growth business. And if the future of cars is less revolutionary than evolutionary, ALD still looks undervalued even after Thursday's 8.7% share price jump.

You don't have to buy into the idea that we'll all be only jumping in and out of self-driving electric taxis in the future to see that our relationship with cars is already changing.

Banks and carmakers have long owned companies to finance vehicle purchases. The difference in recent years is that more consumers are using lease plans that allow them to pay monthly and hand back the car at the end of a contract.

That leaves lenders exposed to the resale value of used cars. In the U.K., about 80% of new car sales are on these terms, prompting the Bank of England to warn a few years ago about the risks. But since the Covid pandemic, used-car prices have rocketed due to shortages of new cars and brought extra profits to ALD as well as other big lessors such as Volkswagen and BMW.

The longer-term bet is that the resale question will become ever less relevant as everyone in effect just rents over various periods of time.

But these trends leave big questions over what a business like ALD might ultimately be worth. It has struggled to hit the valuation levels that some expected since the French bank listed 20% of the company in Paris in 2017.

Still, the deal makes a lot of straightforward financial sense for SocGen. The bank is putting more of its capital into an operation that produces higher returns than other parts of its business. The deal values LeasePlan at 6.7 times expected 2021 net profit, in line with ALD's market valuation of 6.5 times earnings for 2021. And the mix of shares, cash and capital release from ALD that is funding the deal means SocGen isn't using much of its own capital.

With relatively conservative-sounding cost savings at ALD, the profit gains look like a reasonable bet. The bank expects the deal to boost ALD's earnings by 20% by 2023 and SocGen's own earnings by 5% a year later.

After the deal, the current owners of LeasePlan will have nearly 31% of the enlarged ALD, while SocGen will have about 53%, leaving a free float of about 15%. The free float will be larger in euro terms, adding liquidity to the stock and perhaps helping to boost its valuation as more investors can trade it. A year after completion, the LeasePlan owners will be able to start selling their holdings slowly, further boosting liquidity.

There aren't many comparisons for what the enlarged ALD should be worth, as most leasing companies are owned outright by big carmakers, or banks, including BNP Paribas. However, Canada-listed Element Fleet Management Corp., a smaller company focused on managing corporate fleets rather than consumer leases, is valued at nearly 15 times forecast earnings in 12 months' time.

That compares with ALD's 8.6 times earnings on the same basis after Thursday's share price rise.

SocGen's shares, which rose 1.4%, are valued at barely 8 times forecast earnings. The bank is a long way from winning investors back to its own story, so putting time and money into a growing and probably undervalued business like ALD looks like a good thing to do.

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This column does not necessarily reflect the opinion of the editorial board or Bloomberg LP and its owners.

Paul J. Davies is a Bloomberg Opinion columnist covering banking and finance. He previously worked for the Wall Street Journal and the Financial Times.