Hertz could target Dollar Thrifty after dust from auto restructuring settles

Merger Market December 2008

As the hurricane gripping US auto manufacturers threatens to flatten weaker car rental agencies, New Jersey-based Hertz Global Holdings (NYSE:HTZ) could emerge an acquirer, according to two industry lawyers, an industry banker and an industry analyst. Dollar Thrifty remains the only large logical target for Hertz, they added.

All the sources agreed, however, that a deal is unlikely until the fate of the Big Three automakers becomes clear and debt capital markets normalize. For now, Hertz will probably focus on ensuring access to liquidity and on improving cash flow, rather than making buys, said the industry banker.

Reduced economic activity took its toll on the car rental industry yesterday when Advantage Rent A Car, a smaller national operator, filed for bankruptcy citing decreased travel as a critical factor. The market caps of both Oklahoma-based Dollar Thrifty and New Jersey-based Avis Budget shrank to USD 24.5m and USD 75m, respectively, in the last few months.

Hertz stands out as a relatively solid operator amid the wreckage with a market cap of USD 1.06bn, and was able to refinance USD 825m in asset-backed debt in September. The company compares favourably to Avis and Dollar Thrifty because its offerings are more diversified, according to an industry lawyer. Hertz has a sizeable European rental business as well as an equipment rental unit.

Hertz’s unsecured bonds due 2014 traded around 50 today, while Avis’ unsecured debt maturing the same year traded at 27, according to MarketAxess.

In Hertz’s earnings call last month, CEO Mark Frissora said the industry can use further consolidation, in response to an analyst’s questions about the impact of Enterprise-Rent-a-Car’s acquisition of Vanguard last year. Everyone in the industry would like to see Dollar Thrifty, the smallest of the four biggest car rental companies, consolidated because it cuts prices aggressively to compete with its larger counterparts, said the industry banker.

Hertz could pursue Dollar Thrifty if its stock gets cheap enough or, more likely, if and when the company files for bankruptcy, said an equity analyst covering Dollar Thrifty. Hertz has discussed such an outcome in talks with investors, and could have made a move for Dollar Thrifty at an earlier point, but chose to wait for its value to decline further, the Dollar Thrifty analyst added.

Hertz declined to comment. Dollar Thrifty officials did not return calls. The likelihood of Hertz buying Dollar Thrifty declined significantly over the last six months, said Mike Kane of the Vehicle Replacement Consulting Group (VRCG) in Michigan, a firm that helps car rental companies manage their fleets.

No one has the resources to acquire companies like Dollar Thrifty at present because the refinancing market for their debt has shut down, the first industry lawyer added. If Hertz were to buy Dollar Thrifty, it wouldn’t be able to refinance the debt of those targets, which is a necessity for an acquisition, said the second industry lawyer.

Dollar Thrifty has USD 2.6bn in debt. Its USD 350m Libor+ 200bps revolver facility was quoted 45-49 yesterday, down from 47-55 last week and the mid 70s in October, according to Markit.

Another potential minefield for the entire industry is the potential bankruptcy of the Big Three automakers, said the first lawyer. Car rental companies contract to sell large blocks of their fleets back to the OEMs but the manufacturers won’t honor those deals if they file for bankruptcy, the first lawyer said.

Hertz might have an antitrust problem in trying to buy one of its competitors, noted the second industry lawyer. According to Hertz’s latest annual report, the company’s market share at 180 of the largest US airports is 28% compared to 11.6% for Dollar Thrifty and 30.3% for Avis Budget.

Though Hertz boasts strong penetration in the business travel market, it lacks a brand for the leisure traveller and discount customer, said the industry banker and the Dollar Thrifty analyst. But for now, it makes more sense for Hertz to grow by taking market share from its rivals than by acquiring one of them, the banker said.

The company is already doing that with certain initiatives such as offering an hourly car rental service that competes with Zipcar, the banker added. Moreover, Frissora is known for steering clear of buys in his last job at Tenneco, the Illinois auto parts company, the banker noted.

Right now, Hertz has its own troubles to focus on, said the industry source. The rental agency’s net income fell to USD 10m in the first nine months of this year vs USD 185m in 2007, and that’s before the worst of the car rental downturn started in late September. Hertz carries USD 11.9bn in debt.

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