CONSUMER: Car Inc Steps Up Uber Challenge, Dumped by Hertz

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Bottom line: Hertz’s sale of its Car Inc stake reflects the Chinese company’s new focus on hired car services, and could see Car Inc fall into the red as its UCar affiliate vies with Uber and Didi Kuaidi in the fiercely competitive market.

Hertz dumps Car Inc

A complex transaction involving Car Inc (HKEx: 699) is making the headlines as the new week begins, reflecting a transformation from its roots as a rental car specialist into a hired car services company competing with Uber and Didi Kuaidi. The deal will see former strategic stakeholder Hertz (NYSE: HTZ) sell most of its stake in the company to UCar, Car Inc’s hired car services affiliate. At the same time, Car Inc’s chairman and one of its largest shareholders will also sell his stake in the company to UCar, which will become one of Car Inc’s biggest shareholders.

There’s no explanation for the shuffle in the announcement, but it does seem to show that Car Inc’s Chairman Charles Lu wants to move his company more quickly into the hired car services sector, which is growing faster but is also fiercely competitive. That would explain Hertz’s decision to sell its stake, since Hertz is a global rental car company that probably has little interest in China’s ultra competitive hired car services market.

According to the latest announcement, Hertz will reduce its holdings in Car Inc to 1.7 percent from a previous 10.2 percent. (company announcement) Hertz is getting a pretty good deal for its shares, selling them for about HK$9.16 apiece, representing an 8 percent premium from their last closing price in Hong Kong.

The sale price also represents a similar premium over Car Inc’s IPO price of HK$8.50, following its listing in Hong Kong in 2014. Hertz has been a longtime shareholder of Car Inc, originally purchasing 20 percent of the company in 2013 as a strategic investment in China’s fast-growing rental car market. But it began selling down its stake shortly after Car Inc’s IPO, and I expect it will probably dump its final small holding later this year.

Chairman Sells Shares

Meantime, the latest announcement says that Car Inc’s Chairman Charles Lu will sell all of his shares in the company to UCar, also at a price of about HK$9.16 apiece. Lu currently holds about 15 percent of Car Inc. So UCar will receive that 15 percent, plus about 8.5 percent of Car Inc held by Hertz. That amount, combined with 5 percent of Car Inc shares already owned by UCar, will bring UCar’s total holdings in Car Inc to about 29 percent.

Following all this shuffling, Lu and other shareholders acting in concert with him will control just under 50 percent of UCar. The entire deal sounds a bit complex, but the bottom line does seem to be that Lu wants to move more aggressively into hired car services. As part of that move, Car Inc would probably become a major supplier of cars to drivers hired by UCar to ferry passengers around various Chinese cities.

This particular move looks very typical for China, where everyone likes to jump on the latest trend, which in this case is hired car services. Uber and Didi Kuaidi are already locked in a fierce battle for market share, with each raising billions of dollars last year to support their money-losing operation. The other major player, Yidao Yongche, also found a wealthy backer last year in LeEco (Shenzhen: 300104), formerly known as LeTV, which invested $700 million in the company. (previous post)

With all that money pouring into the sector, things certainly don’t look too promising for UCar, which will also have to find funds to subsidize its service to compete with the others. That could ultimately hurt Car Inc and even push the company into the red, since Lu will probably find a way to use his original rental car company as a vehicle to subsidize his push into hired car services.

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