- The coronavirus pandemic has hurt countless companies and forced them to rethink on their business strategies and restructuring plans.
- Amid shrinking demand, stalling of operational activities, and growing uncertainties, several companies took steps to reduce their cost base. At the same time, many divested their non-core asset or non-core business to focus on their core business.
- Fleet leasing provider Eclipx signed an agreement with Growth Factor Group to sell its entire stake in Right2Drive for up to A$26.5 million.
- The sale of Right2Drive would accomplish the non-core divestment program of Eclipx, which is an essential component of the Company’s Simplification Plan, devised a year back, way before the current unforeseen scenario.
The COVID-19 pandemic has impacted various companies and has compelled them to rethink on restructuring their respective businesses. Despite having contingency plans in place, no organisation would have been prepared for such an economic crisis. Companies undertook various measures, including cost reduction, to keep themselves in business. Divesting non-core assets or businesses to concentrate on the main business has been one approach corporates are following of late to have a lean, sustainable business model. Simultaneously, through divestment, these companies can increase cash in hand and put the proceeds to good use.
A recent report, published by McKinsey on 10 July 2020, highlighted that the economic impact of COVID-19 would continue for a longer-than-expected duration and could continue in 2021. Hence, to maintain long-term profitability, companies are looking at ways to streamline their cost base. They also see restructuring as the means to maintain cashflows and liquidity to support recovery.
In this backdrop, we would look at one such Company, Eclipx Group, which has signed an agreement to sell its entire stake in a diversified financial brand, Right2Drive.
Before getting into the details of the sale of this business, let us first know about the Company.
Eclipx Group Limited (ASX:ECX)
Eclipx Group Limited is an established player in the field of vehicle fleet leasing, fleet management and diversified financial services across Australia and New Zealand. On 20 July 2020, the Company announced the sale of one of its financial services brands Right2Drive.
Right2Drive operates across various locations in Australia and New Zealand round the clock and gives “not at fault” drivers with like-for-like loan vehicles after an accident. The Company also supplies rentals to the corporate and leisure sectors. It has provided its services t0 over 100,000 customers during its entire journey.
Sale of Right2Drive:
Eclipx Group, on 20 July, signed a binding agreement to sell 100% of its shares in Right2Drive to Growth Factor Group for A$26.5 million in fixed and contingent consideration. The sale of Right2Drive is subject to a notification to the New Zealand Overseas Investment Office along with the valid Eclipx lender approval. The process is anticipated to complete on 17 August.
The fixed consideration of the agreement is worth A$19.2 million. This includes A$15 million to be paid at the time of the completion of the transaction, and the remaining A$4.2 million to be paid post the completion of 18 months of the transaction.
The contingent consideration is up to A$7.3 million and will be payable every six months after the completion for a period of up to two years. The payment would be based on pre-agreed collection rates on the existing Right2Drive debtor book. As of 31 March 2020, the carrying value of Right2Drive was A$28 million.
How will the sale of Right2Drive be treated on FY2020 Financial Accounts?
A non-cash loss on sale will be recognised in ECX’s FY2020 financial accounts. It would depend on the difference between the total consideration and the carrying value. It would depend on the accounting judgements regarding deferred and contingent consideration.
The transaction comprises of an ongoing commercial relationship with Right2Drive which includes the right to provide new vehicle leases to Right2Drive for three years. Also, all the current leases between Eclipx and Right2Drive will remain on foot.
Further, there would be a limited transitional services arrangement for up to six months. The Company would use the net proceeds generated by the sale of this business division in the reduction of the corporate debt facilities.
As per the CEO of the Eclipx Group, Julian Russell, the sale of Right2Drive would complete the non-core divestment program of the Company, which is an essential part of the Company’s Simplification Plan.
Through the sale of Right2Drive, the Company would be able to concentrate on further developing the core fleet and novated business. It would be able to focus on delivering superior fleet leasing and management customer experience, driving sustainable returns & improving the product & service plan to seize the unique funding platform and abilities.
ECX’s Response to COVID-19:
Amid COVID-19 crisis, a series of precautionary measures were taken by the Board of the Company to mitigate any risk arising from the subdued economic environment. Some of them were:
- Entire office-based employees were operating from the remote location.
- Restricted all non-essential operating expenses.
- Decreased all non-essential capital expenses.
- Reduced employee cost base temporarily via salary cuts.
Liquidity & Lease Extension Update:
In the recent business update provided by the Company on 29 June 2020, the Company expected its available liquidity by the closure of 30 June 2020 to be A$120 million. The lease extension as a percentage of total leases expiring during 2H20 improved to 22% due to the lease extension strategy of the Group.
Based on the liquidity position of the Company at that time, the Company decided to reprioritise its focus to new business writings over lease extensions. Further, the Company also updated that it aims to reinstate all employee and Director compensation to pre-COVID-19 levels, effective from 1 July 2020.
New Business Writings:
New Business Writings in Corporate operating leasing in the present scenario accounts for approx. 70-80% of average pre-COVID-19 levels (October 2019 to February 2020 average), which shows lease extensions as an alternative for renewals or new business writings. Further, the novated monthly volumes are tracking at ~ 75% to 80% of average pre-COVID-19 levels.
The sale process of Right2Drive was under progress during the period.
On 20 July 2020, ECX shares settled at A$1.395, up 7.308% from the previous close. The Company has a market cap of A$415.53 million and ~319.64 million outstanding shares.