AVCJ Awards 2018: Deal of the Year - Mid Cap: Joy Rent a Car

Two months ago, Hahn & Company agreed Korea's largest-ever non-government corporate restructuring with the $3.7 billion acquisition of SK Shipping. By comparison, the $70 million purchase of Joy Rent a Car in May seems somewhat insignificant. However, the company is a key component in a strategy intended to take used car services to another level. 

"While we like the car rental market in Korea, we bought Joy Rent a Car as a platform to launch to new businesses, which we will support with a large capital injection into the company," says Scott Hahn, CEO of Hahn & Co. "One new area of opprobrium is re-rentals. In Korea, rental agreements are usually 2-3 years, but a car can be rented for longer than that. We want to take a car that was previously new and rented and open a new market where you can cost-effectively do a re-rental into later years. The other business is used car financing, which has very low penetration in Korea."

Joy Rent a Car is a top 10 player but trails far behind the two market leaders, which are controlled by Lotte Group and SK Group. The parent company, CJ Group, regarded the business as a non-core asset and was open to Hahn & Co's advances. 

Two birds, one stone

That transaction is inextricably linked with another, more complex corporate carve-out the private equity firm completed in April, six months after signing a definitive agreement. It was the acquisition of SK Encar, Korea's largest used-car retailer, from SK Group for $140 million in equity that triggered the search for a complementary car rental player. Used car retailers are not allowed to operate financing entities, so Joy Rent a Car was required to serve as the foundation for the new business.

"During those six months, we were actively looking for car rental companies that could work with SK Encar," says Hahn. "Several fit that profile. Joy stood out because it was well managed by CJ; it was sizeable but not extremely large; and we could use it as a platform – expanding the business lines as well as growing the core operations."

Korea's used car market is worth $28 billion a year and growing faster than the new car segment, according to Hahn & Co's estimates, but most sales are made by small-scale operators. About 5% of the 3.78 million used cars sold in the country in 2016 are said to have passed through SK Encar's network, which comprises 26 outlets. The second-largest player has about seven outlets.  

Consolidation is expected to feature prominently in the value creation strategy. So too is digitization. About one quarter of Hahn & Co's investment activity is in the consumer products and services space, but used car retail stands out as an area in which the online and offline worlds have yet to properly collide. Although there are plenty of classifieds sites – SK Group carved out Encar.com prior to this sale, with Australia's Carsales.com assuming full ownership – few have managed to take the next step and establish themselves in e-commerce.

 At the same time, while 70-80% of new cars have some form of lease financing, this applies to just 40% of used vehicles. The equivalent figures in the US market are 85% and 55%. SK Encar – which has been renamed K Car – is low even by Korean standards. Fewer than 20% of vehicles sold have financing. On the rental side, a growing number of domestic drivers prefer long-term rental rather than lease agreements because maintenance and other costs are covered by the provider. But the re-rental market is non-existent. 

"Re-renting and used car financing are essentially similar businesses," Hahn adds. "Korean consumers are becoming more sophisticated in terms of financing and they are comfortable with leverage. Credit systems are important, but it is very difficult to finance a used car if you are not a used car retailer. You need a physical lot, somewhere to park the car and assess it properly."

Synergistic play

In addition to providing expansion capital, Hahn & Co. is bringing in expertise. The management team at Joy Rent a Car has already been bolstered with executives who have experience in new car financing as the company prepares to roll out re-rental and used car financing services. The initial focus at K Car is on bringing the financing penetration for vehicles sold through its own lot closer to the industry average. Should these goals be achieved, the companies can look towards a broader institutionalization of the financing market.

Joy Rent a Car and K Car will never become part of the same platform – they are legally required to remain separate entities – but success is contingent on the exploitation of synergies between the two businesses. 

"We are tapping into the used car financing market using K Car's information and nationwide networks," Hahn says. "A new car has a defined value – the sticker price – and it depreciates over some set period. Three years in, once the car rental period is over, you have no idea what condition it is in, the warranties you need, how to acquire new customers. Joy Rent a Car is working closely with K Car on that. Without that relationship, it would be a very difficult business to do."   

Pictured: Scott Hahn of Hahn & Company

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• Topics
• North Asia
• Buyouts
• South Korea
• Hahn & Co
• automobiles
• AVCJ Awards