[M&A Insights] SK Rent-a-Car Sale Process... What Is the Outlook for the Domestic Rent-a-Car Market?

Affinity Wins SK Rent-a-Car Acquisition Battle
Company Valued at 3 Trillion Won as a 'Prime Company'
Expanding Individual Customers... "Positive Industry Outlook"

SK Rent-a-Car, considered a major target in the M&A market in the first half of this year, is set to be acquired by Affinity Equity Partners, a Hong Kong-based private equity firm (PE). Affinity was selected as the preferred bidder by offering the highest price in a three-way competition with major domestic and international PEFs such as Glenwood PE and IMM PE.

In this M&A insight, we will explore the background behind SK Rent-a-Car being put up for sale, the profit structure of domestic rent-a-car companies, and the market situation.

Premium Asset Emerges... Major PEs Enter Acquisition Battle

According to the Financial Supervisory Service's electronic disclosure system on the 18th, SK Networks announced on the 16th that "Affinity has been selected as the preferred bidder for the sale of SK Rent-a-Car, and a memorandum of understanding (MOU) has been signed for the negotiation of the main contract," adding that "specific terms are currently being negotiated between the parties. The expected sale price is approximately 850 billion KRW based on SK Networks' 100% stake in SK Rent-a-Car." The total enterprise value, including SK Rent-a-Car's net debt of about 2 trillion KRW, reaches 3 trillion KRW. The transaction is expected to be completed after due diligence, signing of the stock purchase agreement (SPA), and payment of the purchase price.

SK Rent-a-Car was established in 1988 and listed on the KOSPI market in 2012. In 2019, SK Networks acquired a 42% stake for 300 billion KRW, and the company name was changed from AJ Rent-a-Car to the current SK Rent-a-Car the following year. The largest shareholder, SK Networks, transferred its in-house rent-a-car business and achieved profitability improvement and external growth for SK Rent-a-Car. Last year, it voluntarily delisted after a tender offer involving an investment of 120 billion KRW to make it a 100% subsidiary.

SK Rent-a-Car has been a key profit center within the group. It is the second-largest operator in the industry by vehicle registration volume (187,915 vehicles), holding a market share of 15.4%. The revenue composition is 70.3% from the rent-a-car business and 27.4% from used car sales. Last year, it recorded consolidated sales of 1.4028 trillion KRW and operating profit of 121.9 billion KRW, representing increases of 12.5% and 28.3%, respectively, compared to 2022. This accounted for more than half of SK Networks' annual operating profit of 237.3 billion KRW.

News of this cash cow company being put up for sale attracted major domestic and international PEs to the acquisition battle. The winner was Affinity. Although Affinity had not been prominent in the domestic M&A market recently, it reportedly secured the deal by offering the highest price before the full corporate due diligence began.

SK Networks plans to use the proceeds from the sale of SK Rent-a-Car to transform into an artificial intelligence (AI) investment company. Yuje-seon, a researcher at Hana Securities, explained the background of the sale: "While SK Networks has moved away from a growth strategy focused on aggressive expansion of operating vehicles to increase market share, it still requires large working capital, which has been somewhat burdensome in the current interest rate environment. Once this sale is completed, SK Networks' consolidated operating profit will decrease, but its debt ratio will fall below 200%, significantly easing interest expense burdens."

Interest Rates Determine Profitability... "Growth Maintained by Expanding Individual Customers"

Typically, rent-a-car companies generate profits from 'vehicle rentals' and 'used car sales.' The company first purchases vehicles and rents them to customers for a short term (within one year) or long term (over three years), generating rental income. After the rental period ends, the used cars are sold to generate sales revenue. When rental fees and used car prices rise, the profit margins of rent-a-car companies increase.

The domestic rent-a-car market is generally continuing its growth trend. The market leader is Lotte Rental, holding a 20% market share. The remaining shares are divided among SK Rent-a-Car, Hyundai Capital, Redcap Tour, and others. The number of registered passenger cars in Korea increased from 18 million in 2018 to about 21 million in 2022, while the number of licensed rent-a-car vehicles rose from 850,000 to 1.2 million during the same period. Park Jang-wook, a researcher at Daishin Securities, said, "In terms of the number of rent-a-car users, not only corporations but also individual users are increasing, steadily expanding the overall market size." The ratio of corporate to individual customers, which used to be about 8 to 2, is gradually moving toward a 5 to 5 balance.

The key to profitability is the interest rate environment. Rent-a-car companies usually raise funds through corporate bonds, so when interest rates fall, financing costs decrease. Park said, "Operating expenses outside of sales are expected to decline with future interest rate decreases. Although there may be volatility in used car sale prices, they are expected to remain relatively stable at current levels."

Jang Moon-soo, a researcher at Hyundai Motor Securities, stated in a recent automotive industry report, "Lotte Rental's operating profit in the first quarter of this year is expected to be 59.3 billion KRW, down 30.4% from the same period last year, falling short of market expectations. The base effect of reduced operations from late 2022 to early last year, when interest burdens were high, has led to a net increase in long-term rental vehicles and profit improvement." SK Rent-a-Car also recorded its best operating performance since its founding last year, but its pre-tax net income increased by only 7.37% to 32.6 billion KRW. This was due to a 59.13% rise in financial costs to 91.9 billion KRW caused by continuous interest rate hikes.

Meanwhile, a legislative improvement recognizing long-term rent-a-car driving experience as insurance subscription experience starting in June is seen as a positive development for the industry. The financial authorities have revised standards to reasonably acknowledge accident-free and driving experience, thereby reducing insurance premium burdens. Park emphasized, "In advanced countries, insurance experience has already been recognized for long-term rent-a-car users. This legislative improvement is expected to positively impact the increase in individual rent-a-car usage."