Hertz’s Bid for Dollar Thrifty Seen Doubling in Price: Real M&A

Hertz’s Bid for Dollar Thrifty Seen Doubling in Price
Hertz’s first agreement to acquire Dollar Thrifty two years ago ultimately fed a bidding war with Avis Budget Group Inc. Photographer: David Paul Morris/Bloomberg

Hertz Global Holdings Inc.’s two-year pursuit of Dollar Thrifty Automotive Group Inc. is on the verge of doubling in price.

Hertz, which first tried to buy the car-rental company in April 2010, said this month it agreed on “material terms” to divest its Advantage brand, a key hurdle in obtaining antitrust approval for a potential combination with Dollar Thrifty. In October Hertz had said it would reassess the bid price after getting regulatory clearance. Now Dollar Thrifty trades at $2.3 billion, near a record valuation relative to its sales, according to data compiled by Bloomberg.

If Hertz wants to hold on to its position as the second-largest U.S. car-rental chain behind closely held Enterprise Holdings Inc., this time around it may cost at least $85 a share to buy Tulsa, Oklahoma-based Dollar Thrifty, said Avondale Partners LLC and MKM Partners. That would be more than double Hertz’s original offer of $41 a share two years ago and a 27 percent increase from the value of the most recent cash-and-stock bid when it was withdrawn in October. A new bid from Hertz will need to win over a company that has boosted profit 126 percent in two years and said it wants to remain independent.

“Dollar Thrifty probably will be pretty demanding,” Nancy Havens-Hasty, president of Havens Advisors LLC, a New York-based merger arbitrage fund manager, said in a telephone interview. Hertz “finally said that they’re very, very close to a settlement. It’s a once in a lifetime opportunity that they’ve been working on. This has been taking forever.”

Havens Advisors owned shares of Dollar Thrifty as of March, according to a regulatory filing.

Bidding War

Richard Broome, a spokesman for Park Ridge, New Jersey-based Hertz, wouldn’t comment on whether the company is preparing a new offer for Dollar Thrifty or at what price. Brian Shiver, a spokesman for Dollar Thrifty, declined to comment on the price at which the company would consider selling.

Today, shares of Dollar Thrifty increased 1 percent to $80.75. Hertz fell 10 cents to $14.41.

Hertz’s first agreement to acquire Dollar Thrifty two years ago ultimately fed a bidding war with Avis Budget Group Inc. that resulted in at least five more attempts to buy the company, according to data compiled by Bloomberg. Dollar Thrifty’s stock, which ended at $79.98 yesterday, had closed as high as $83.74 in June as traders bet on escalating offers.

Regulatory Approval

The most recent bid from Hertz was for $57.60 in cash and 0.8546 in Hertz shares for each Dollar Thrifty share owned. While that equated to $72 a share when it was announced in May 2011, the value had declined to about $67.01 by the time the bid was withdrawn in October. Avis had already dropped out in September, citing “market conditions.”

When Hertz pulled the unsolicited bid, the company said it would continue to pursue U.S. Federal Trade Commission approval for the acquisition. The car-rental agency also said that after receiving regulatory clearance it would reevaluate an appropriate takeover price based on Dollar Thrifty’s stock buybacks and financial performance and overall market conditions. Dollar Thrifty has since repurchased $100 million of its shares, the company said in February.

Hertz and an unnamed potential buyer have reached terms for the divestiture of Advantage, Hertz Chairman and Chief Executive Officer Mark Frissora said on a May 3 conference call. Hertz is “optimistic” that will satisfy the FTC, allowing it to “consider the terms” for moving forward with a takeover of Dollar Thrifty, he said.

‘End Game’

“We’re in the end game right now,” Roy Behren, who co-manages the $5 billion Merger Fund at Westchester Capital Management Inc. in Valhalla, New York, said in a phone interview. “We expect to see an agreement with the FTC shortly, followed by the parties engaging in conversations. There’s a good likelihood that they will arrive at an agreed upon transaction price.”

The firm owned about 2.4 million Dollar Thrifty shares as of yearend, making it the company’s third-largest shareholder. More than half of Dollar Thrifty’s 10 biggest investors are hedge funds, data compiled by Bloomberg show.

Dollar Thrifty has boosted net income for four straight quarters as it controlled costs and benefited from higher used-car prices, which help lower depreciation, one of the largest expenses for rental-car companies. Profit of $183 million in the last 12 months is up from $81 million in the 12 months prior to Hertz’s initial bid, data compiled by Bloomberg show.

Since that first offer, Dollar Thrifty’s shares climbed 106 percent through yesterday, compared with only a 5 percent gain for the Russell 2000 Index.

Hertz’s Dilemma

The company was trading yesterday at 1.49 times revenue in the last 12 months, approaching its record price-to-sales multiple of 1.56, data compiled by Bloomberg show.

“The dilemma for Hertz at this point is, because of the time it’s taken for them to do the deal,” Dollar Thrifty’s stock has climbed, Keith Moore, an event-driven strategist at MKM Partners, said in a phone interview from Stamford, Connecticut. “Earnings have dramatically gone up.”

As profit has climbed, Dollar Thrifty Chairman and CEO Scott Thompson reiterated as recently as May 9 that he’s continuing to execute on a “standalone plan.” The company’s operating margin has expanded to almost 22 percent of sales last year from less than 10 percent in 2009, remaining higher than both Hertz and Avis.

“They could remain a standalone and do well,” Betsy Snyder, a credit analyst at New York-based Standard & Poor’s, said in a phone interview. “They’ve done a great job on the operations side the last few years.”

Leisure Travel

While Dollar Thrifty doesn’t have to sell, Hertz is a motivated buyer, Snyder said.

Hertz needs Dollar Thrifty to secure its standing as America’s second-biggest rental-car chain in America and to reach more types of customers, said Fred Lowrance, a Nashville, Tennessee-based analyst at Avondale Partners.

The nation’s four largest rental-car companies control 80 percent of the market, according to IBISWorld, the Santa Monica, California-based industry researcher. Enterprise will command 38 percent of the $30.5 billion market in the U.S. this year, according to a February report from IBISWorld. Hertz will have 18.9 percent, followed by Avis with 18.5 percent and Dollar Thrifty at 5 percent.

Hertz’s largest rivals have more than one brand, allowing them to charge varying prices and target everyone from higher-end business travelers to vacationing families seeking a discount, Lowrance said.

‘Instant Presence’

St. Louis-based Enterprise operates National Car Rental and Alamo Rent a Car, as well as its flagship Enterprise Rent-A-Car brand. Avis has both the Avis premium brand and Budget Car Rental, which caters to leisure travelers. Hertz’s Advantage brand is small compared to Dollar Thrifty, Avis’s Budget and Enterprise’s Alamo, Snyder said. Leisure travel makes up 41 percent of the market in the U.S., according to IBISWorld.

“Leisure travelers are a more price-conscious traveler and that’s been the brightest spot of the industry the last few years,” said Snyder of S&P. “This acquisition gives Hertz an instant presence.”

Hertz, which has a market value of $6.1 billion, will now need to pay at least $85 a share to convince Dollar Thrifty’s board and its stockholders to sell, said Moore of MKM and Avondale Partners’ Lowrance.

That price would be a 6.3 percent premium to Dollar Thrifty’s closing amount yesterday and 107 percent more than the value of Hertz’s initial offer in April 2010. It would value Dollar Thrifty’s equity at $2.38 billion, data compiled by Bloomberg show.

‘Harder Ball’

Lowrance said the offer could go as high as the “low $90s” based on recent share buybacks and the record profit that analysts estimate Dollar Thrifty will generate again this year.

“This time, management and the board will play a little harder ball in the negotiation process” than when the company agreed to $41 a share two years ago, Lowrance said. “They just played it all wrong at the very start. Now I think they’re going to be a little more diligent and push back a little bit harder on whatever the price is.”

Michael Millman, founder of Short Hills, New Jersey-based Millman Research Associates, is even more bullish. Dollar Thrifty is worth $100 a share and would still boost Hertz’s earnings at that price, he wrote in a May 9 note.

‘Long Dance’

After already driving up the cost for Hertz to buy Dollar Thrifty, Avis is unlikely to ignite another bidding war as it focuses on integrating the acquisition of Avis Europe Plc, according to David Neiderer, a Philadelphia-based analyst at Penn Capital Management. Avis agreed to purchase Avis Europe, the second-biggest car-rental company on the continent, for $1 billion in June.

John Barrows, a spokesman for Parsippany, New Jersey-based Avis, didn’t return a voicemail seeking comment.

“This has been such a long dance,” Neiderer, whose firm oversees about $6 billion including Avis and Hertz shares, said in a phone interview. “I tend to see Avis as just kind of there to play poker. Hertz needs it more. It will be a decent price for Dollar Thrifty.”


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