Who is in the danger zone?
As the fleet sector holds its breath in anticipation of major
consolidation, it may be strategy rather than size that determines
M&A susceptibility in the changes to come, says Fred
Crawley.
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With liquidity concerns showing little sign of abating, and
environmental pressures in wait to cause further worry to fleet
operators, it seems inevitable to most major players that we will
soon see significant withdrawals from the fleet market. The
landscape of the sector is set to change, and according to Jon
Walden, MD of Lex, this will happen through consolidation of
mid-sized operators.
With very little M&A activity since HBOS’ acquisition of the
half of Lex it did not already own in May 2006, and Leasedrive’s
merger with VELO in early 2007, rates of growth in the industry
have been approaching stagnation. Growth and shrinkage has been
largely organic – only three UK fleets among the 50 largest saw
more than a 20 per cent change in either direction between 2006 and
2007.
For most firms, business has expanded through renewal of
existing leases rather than the acquisition of new vehicles.
However this model will not hold up for long as “lower employment
resulting from economic downturn decreases the demand for leased
vehicles”, according to a recent article in The Daily
Telegraph.
In the article, Walden commented on the recent quietness of the
market in consolidation terms, and set out stern predictions. He
expected fleets operating between 40,000 and 60,000 vehicles (which
he called mid-sized) to be “squeezed out” of the market, which he
claimed was “clearly going to segregate into a small number of
large companies and a large number of small ones”.
He also added that he would “not be surprised if a major player
decides to exit the sector”.
Elaborating on these comments for Motor Finance, Walden stressed
that his predictions were to be seen “in the historical context of
the market’s evolution over the last ten years. The large companies
have grown larger, while the small have survived well.”
Walden put this pattern in the frame of a customer-led market:
economies of scale working in favour of the largest fleets and
small companies offering a “good, personal local service” thriving
on “immediacy of contact with the customer”.
The mid sized fleets, said Walden, could benefit from neither
set of strengths enough to retain their market shares – hence the
“squeezing out” that he predicted.
Few would argue with Walden on the most general terms – upcoming
shakeups are seen as inevitable, and most commentators agree that
the superfleets and the smallest local firms are most secure from
change. The questions causing most debate are over what counts as
the risky no-man’s land between the titans and the tiny, what
strengths will keep companies in play there, and what will happen
should such strengths falter.
Setting the goalposts
If mid-sized fleets are an endangered species, what is
mid-sized? Certainly fleets of 40,000–60,000, although small
compared to the 250,000+ leviathan of Lex, are by no means in the
centre of the market. In fact, this band encompasses the 7th to
13th largest fleets in the country – one would think that the
“middle” would stretch further than that.
Roddy Graham, commercial director of 17,860-vehicle operator
Leasedrive VELO, would define the mid-sized players as anyone
outside the top handful of fleets and yet larger than local brokers
– a category into which his company, and the majority of the top
50, would fall.
Graham is not alone in using this definition. BVRLA
director-general John Lewis considered 20,000 as the lower reach of
the “middle market”, as did Paul Hollick, general manager of sales
development for Alphabet, a company which theoretically falls into
Walden’s danger zone.
Hollick agrees with Walden that middle-sized companies risk
falling short between the care of locals and the economic momentum
that comes with great size, but feels that such a risk occurs below
the 40,000 threshold. Companies of Alphabet’s size just above that
threshold, say Hollick, are large enough to carry the same solid
reputation as the superfleets, but with the advantage of quicker
reaction to market conditions due to a less cumbersome company
structure.
His boundary makes sense by the numbers: the 8th to 13th ranking
fleets of the top 50 all operate between 40,000 and 50,000
vehicles, after which there is a drop to Inchcape at 14th place,
operating 33,496 vehicles. This no-man’s land may suggest that
companies are indeed nervous to expand and operate in that field of
size, especially in a financial climate so potentially unforgiving
to rapid, high geared growth.
Minding one’s own business
Upon speaking to representatives of fleets of all sizes, it
becomes obvious that everyone is keen to nominate areas of danger
outside the purview of their own operations. Whereas these
designations of risk areas carry plenty of argumentative weight,
they soon paint potential downfall across the entirety of the size
spectrum.
As Graham says, “we are all under the cosh. This has all
happened to the industry before, and companies just have to make
sure they are in the right shape to get through now.” It may indeed
now be ‘shape’ rather than size – the strategies and structures
that companies adopt in reaction to their individual circumstances
– that keeps operators intact in future.
Any departures from the market may well also occur as a result
of strategic decision rather than failure. Lewis thought it would
not be a surprise if a number of car manufacturers decided to
withdraw from leasing and hand over customers to the “bigger
pockets” of the banks.
At the same time, he entertained the possibility that some of the
fleet-owning banks might make the decision to cut their leasing
operations in order to pull resources back to their troubled core
areas of business.
Even if these changes come, it may be unlikely that much M&A
activity actually takes place as a result. Lewis comments: “We are
unlikely to see much consolidation in the medium-to-large sector of
the leasing industry. Merging companies of this size is unlikely to
realise any significant savings in terms of systems or vehicle
acquisition costs. Also, the current lending environment makes it
less likely that a company is going to finance a takeover with
borrowed money.”
