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VW Set to Buy ABN AMRO Auto Leasing Unit

September 7, 2001

Volkswagen AG is close to agreeing to buy Dutch financial services group ABN AMRO's auto leasing business after months of negotiations, according to Reuters. Both companies declined to comment on the proposed deal, although ABN AMRO spokesman Geert Pielage reiterated that its leasing unit, ABN AMRO Lease Holding, which includes its LeasePlan vehicle management company, was not a core business. VW is seeking to expand its leasing activities as part of a strategy to develop its financial services division and has expressed a willingness to make acquisitions to do this. The carmaker was on the brink of purchasing a leasing business in a deal worth almost one billion euros ($888.9 million), sources told Reuters. At this price, and based on a pretax profit of 149 million euros from the business in 2000, analysts said VW would not be paying over the odds compared to other financial service companies and would add some 9.4 billion euros in assets to VW's existing 22.8 billion euro financial services assets. VW said that it can build on a trend toward pan-European fleet management, and some analysts say that by adding 1.2 million cars under management from the ABN AMRO business to its existing 500,000 cars under management, it can achieve a strong position in the car leasing arena. The acquisition would also help it toward other strategic objectives, moving it away from its core area of car manufacturing. "From a strategic point of view the move down the automotive value chain is crucial for a successful future automotive business model," WestLB Panmure said in a research note, highlighting the increasing importance of fleet management, used-car management and customer relationship management. "Therefore, we believe that in future car manufacturers – not non-captive banks or others – will sit in the driver's seat offering car-related financial services products," said WestLB, which also raised its VW target price to 55 euros from 49 euros. This view was echoed by other investment banking analysts. "We believe such a move by VW to grow along the value chain would make strategic sense. About 70 percent of the profits generated by a car over its lifecycle are not tied to the original sale but stem from financing, insurance, fuel and services, and car manufacturers will try to capture a bigger part of this profit stream," another investment bank said in a note. But other industry experts say the carmaker will have its work cut out to make money from the ABN AMRO business. "This is still quite a dangerous deal to do, even Daimler is selling its (leasing) business that is not related to its own cars," said one investment banker, adding that VW could struggle to persuade fleet customers to switch manufacturers. "With cars that are not their own in the portfolio, they will also have problems working out residual values," he added.
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