Deal focus: Hahn & Co finds its place in auto retail

South Korean private equity firm Hahn & Co. has entered the automobile retail and services industry with two carve-outs from domestic conglomerates. First, it prevailed in a limited auction to buy SK Encar, the country's largest used-car retailer from SK Group for $140 million in equity; then it secured CJ Group's Joy Rent a Car business through a $70 million proprietary transaction.

For the sellers, these were opportunities to offload non-core assets. For the buyer, the transactions are the foundation stones of two new platform investments that offer exposure to a consumer segment where the online and offline worlds have yet to properly collide. 

"This is an area we certainly like more than traditional retail such as restaurant chains," says Scott Hahn, CEO of Hahn & Co. "Both businesses we acquired have potential for digital transformation. And instead of trying to go up against Amazon, we are picking areas where the offline components are very important to the success of the online."

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. SK Encar is the sole big beast. Around 5% of the 3.78 million used cars sold in the country in 2016 are said to have passed through its network, which comprises 26 outlets. The second-largest player has about seven outlets. SK Encar's annual revenue is about $900 million.

SK Group carved the business in two before selling it, with Australia's Carsales.com buying the 50.1% it did not already own of auto classifieds site Encar.com. 

"It is still very localized and among the large internet companies we have yet to see much e-commerce involving used cars. The websites don't do e-commerce, they are just classifieds," says Hahn. "The difficulty is you need physical stock and an offline retail network to run an online used car e-commerce business. You need to handle the warranties, inspect the cars, and deliver them to your home."

Consolidation is now a priority for SK Encar and the company is expected to gain market share through a combination of acquisitions and organic growth. Much the same can be said of Joy Rent a Car, which operates in an industry just as fragmented as used car sales. Lotte Rent-A-Car is the market leader and the competitive field begins to spread out below the top three, with Joy Rent a Car near the bottom of the top 10.

But the company's real growth opportunity is in long-term rentals of 2-3 years where it can take market share from auto financing businesses. "They have been taking significant share from traditional auto financing. An increasing number of Koreans prefer to rent rather than finance cars because the maintenance and other costs are covered by the rental. It's a more comprehensive service," says Hahn. He adds that SK Encar and Joy Rent a Car could also work together in areas such as used car rentals.   

• Tweet  
• Facebook  
• LinkedIn  
• Google plus  
• Save this article  
• Send to  

• Topics
• North Asia
• Buyouts
• Consumer
• South Korea
• Hahn & Co
• automobiles