Richard Branson’s Virgin Group Ltd., the travel and entertainment conglomerate, wants to enter the U.S. rental-car business by buying the assets of the Advantage brand that Hertz Global Holdings Inc. (HTZ) was ordered to divest.
Virgin sent a letter dated June 7 to the U.S. Federal Trade Commission expressing its interest as the FTC decides whether to give final approval to Hertz’s $2.3 billion acquisition in November of Dollar Thrifty Automotive Group Inc. The agency’s concern that Advantage may not be viable with its new owners has delayed that decision, and commissioners can vote to rescind the sale and order the assets resold to another company.
“Virgin looks at opportunities where we believe our brand and service can make a difference for the customer and shake up a market,” said Nick Fox, a spokesman for closely held Virgin, who confirmed the letter. “We feel the car-rental sector is Virgin territory.”
Virgin, which Branson started in 1970 as a mail-order record shop, now is a global conglomerate with 2011 revenue of about 13 billion euros ($21 billion). London-based Virgin has since taken its style, characterized by a cheeky personality and value-priced, high-touch service, into banking, book publishing, air and space travel, hotels, and mobile-telephone service.
Virgin Atlantic airline, for example, offers free drinks and meals in all cabins, and the U.S. airline, Virgin America, has a safety video narrated by a “half snarky pal, half friendly host” who “says things like, ‘For the .0001 percent of you who have never operated a seatbelt before, it works like this,’” according to an Interbrand blog item about the airline.
Now, Virgin wants to get into the rental-car business, and it’s trying to use a delay in the final approval of Hertz’s sale of Advantage to swoop in and take over the assets and operate them under the Virgin brand.
Hertz fell 3 percent to $24.43 yesterday in New York while Avis dropped 3.4 percent to $30.61.
“Clearly the stock is reacting to the fact that Virgin has great brand recognition and they have a history of being a disruptive force,” Fred Lowrance, senior research analyst with Avondale Partners LLC in Nashville, Tennessee, said in an interview.
The Advantage assets represent a way to gain quick access to the largest airports in the U.S., Lowrance said. Ordinarily, a company would have to bid for each airport counter as it became available.
The FTC ordered Park Ridge, New Jersey-based Hertz to sell Advantage and 29 additional airport locations as a condition of acquiring Dollar Thrifty. By doing so, the FTC aimed to create a competitor strong enough to keep the three big companies, No. 2 Hertz, Avis Budget Group Inc. (CAR) and closely held market leader Enterprise Holdings Inc. from having too much power.
Under normal circumstances, the FTC would have approved the consent decree in December following a 30-day comment period
Six months later, the FTC hasn’t completed its approval of the Dollar Thrifty transaction as it weighs the strength and viability of the Advantage brand under its new ownership, people familiar with the matter have said. Hertz sold Advantage to Macquarie Group Ltd.’s private-equity arm in a joint venture with Franchise Services of North America Inc. (FSN) under a consent agreement with the FTC.
“This is a real pocketbook issue for everyday people,” then-FTC Chairman Jon Leibowitz said in a statement announcing the November agreement. “Today’s bipartisan action by the FTC will ensure that consumers are not forced to pay higher prices for rental cars when they travel.”
Since then, the three big rental companies, which dominate the airport car-rental market, have raised prices at a rate not seen since the recession.
Avis, which boosted prices twice in June, said it has “continued to aggressively implement pricing increases in North America.” In the first quarter, Avis raised prices six times and attributed it in part to Hertz’s deal for Dollar Thrifty.
Virgin is working with MCG Global LLC, an investment and management advisory firm co-founded by Vince Wasik, former executive vice president of Hertz and a former chief executive officer of National Car Rental.
Peter Kaplan, a spokesman for the FTC, declined to comment.
Investors and academics have highlighted the opportunity the top three rental-car companies have to raise prices and profitability following the transaction.
“The market significantly underestimates the impact of Hertz’s recent merger with Dollar Thrifty, which marks the completion of a 10-year consolidation that dramatically improves the competitive dynamics of the industry,” three Columbia business school students wrote in a 93-page report that in April won the Pershing Square Challenge investment-thesis contest sponsored by Bill Ackman, the hedge-fund billionaire.
“From the blatant price signaling in earnings call and conference call transcripts, it is clear that Hertz and Avis are focused on profitability and keeping the industry’s car-rental rates high,” Richard Hunt, Stephen Lieu and Rahul Raymoulik wrote in the report.
The FTC’s bureau of competition has continued to investigate the Advantage sale using voluntary submissions from the companies rather than requiring subpoenas or sworn testimony, said two people familiar with the matter, who asked not to be identified because the discussions are private.
FTC staff has recommended that the commission approve the Hertz-Dollar Thrifty consent decree, one of the people said.
Approval requires a majority of the agency’s commissioners, which currently number four, because the fifth seat remains vacant after Leibowitz stepped down in January.
Only three commissioners will vote on the matter, because Josh Wright, a Republican who was confirmed in January, recused himself, saying he hadn’t been involved with the case, said the person. Wright declined to say whether he has recused himself.
The FTC had ordered Hertz to divest extra locations in addition to the Advantage business to protect consumers, citing the $11 billion spent to rent 50 million vehicles at U.S. airports each year. Without the divestitures, the merger would have hurt competition at 72 airports around the U.S., the FTC said when it initially approved the transaction Nov. 15.
The FTC’s investigation focused on whether Macquarie, the approved Advantage buyer, was following through on its commitments to expand and strengthen Advantage after the Dec. 7 ouster of Sanford Miller, an industry veteran who was hired to run Advantage, two people familiar with the matter said in April. Macquarie had said in an e-mail to Miller last July that it didn’t have car-rental experience.