Hertz Buying Dollar Thrifty for $2.6 Billion in Cash

Hertz Global CEO Mark Frissora
Mark Frissora, chairman, president, and chief executive officer of Hertz Global Holdings Inc. Photographer: Andrew Harrer/Bloomberg

Hertz Global Holdings Inc. and Dollar Thrifty Automotive Group Inc. jumped after Hertz struck a deal to buy the smaller company for about $2.6 billion following more than half a decade of trying.

Dollar Thrifty rose 7.5 percent to $87.08 at 4:02 p.m. in New York for the biggest jump since May 2011. The shares have advanced 24 percent this year. Hertz increased 8.1 percent, the most since September 2011, to $14.21.

The $87.50-a-share offer represents an 8 percent premium to Dollar Thrifty’s closing price of $81 on Aug. 24. It’s more than double what Hertz offered a little more than two years ago to secure the company’s No. 2 position in the U.S. market.

“We are pleased to have finally reached an agreement with Dollar Thrifty after a lengthy -- but worthwhile -- pursuit,” Hertz Chief Executive Officer Mark Frissora said in a statement yesterday. “We have always believed that a combination with Dollar Thrifty is the best strategic option for both companies.”

Frissora’s acquisition of Dollar Thrifty may be the last combination of major U.S. car-rental companies that regulators will tolerate, an analyst said. Hertz, Enterprise Holdings Inc. and Avis Budget Group Inc. together control about 75 percent of the market, with Dollar Thrifty at 5 percent, according to a February report from IBISWorld. No other competitor has more than 1 percent market share, IBISWorld said.

Based on 29.8 million shares outstanding, Dollar Thrifty is being acquired for an equity value of about $2.6 billion. It will cost Hertz about $2.3 billion after considering almost $300 million in cash on Dollar Thrifty’s balance sheet at the end of June, said Richard Broome, a Hertz spokesman. Dollar Thrifty traded below $1 a share in March 2009.

Since 2007

Hertz began its pursuit of Dollar Thrifty in April 2007 and made a formal bid in 2010 of about $1.2 billion that Dollar Thrifty shareholders rejected. Park Ridge, New Jersey-based Hertz made another offer last year that it later withdrew, citing market conditions.

Since that 2010 offer, Dollar Thrifty’s shares have more than doubled, compared with a 9.1 percent increase in the Russell 2000 Index. Tulsa, Oklahoma-based Dollar Thrifty has traded at a premium to the index on a price-to-sales ratio since early last year.

“Hertz has made a compelling offer to our stockholders that reflects the strengths of our business and our team,” Dollar Thrifty CEO Scott Thompson said in the statement. “Hertz is the logical partner for us with the resources to expand our value-focused leisure brands in key car-rental markets around the world.”

Advantage Sale

Hertz also said yesterday that it agreed to sell its Advantage brand to Franchise Services of North America Inc. and Macquarie Group Ltd.’s Macquarie Capital. The purchase price was $16 million, one person with knowledge of the situation said. The sale is dependent upon Hertz completing the acquisition of Dollar Thrifty.

Franchise Services, which operates the U-Save brand, is run by Co-Chief Executive Officer Sanford Miller, the CEO of Budget Group Inc. from 1997 to 2004.

Hertz and Dollar Thrifty described their transaction as a two-step process starting with a cash tender offer for all outstanding shares of Dollar Thrifty followed by a cash merger to acquire any remaining common shares. Frissora said on a conference call with analysts and investors that Hertz will use cash on hand and new borrowings to finance the purchase, and that he doesn’t anticipate a credit-rating downgrade.

Credit Watch

Standard & Poor’s Ratings Service said today it put its ratings on Hertz on credit watch, meaning it is considering a downgrade.

The transaction is subject to clearance by the Federal Trade Commission. Hertz said it has remained closely engaged with the FTC to secure antitrust clearance and expects that to come by mid-October.

Hertz and Dollar Thrifty see savings of at least $160 million annually from the combination over the next two years.

The combined company would have reported $10.2 billion in sales and $1.8 billion in earnings before interest, taxes, depreciation and amortization over the last 12 months, according to the statement.

“Dollar Thrifty is the last acquirable rental-car company of size,” Fred Lowrance, a Nashville, Tennessee-based analyst at Avondale Partners, said in a telephone interview. “We may see some other, smaller things happen, but nothing that will change the composition of the industry in any material way.’

Market Shares

Enterprise’s brands will command 38 percent of the $30.5 billion market in the U.S. this year, according to a February report from IBISWorld, the Santa Monica, California-based industry researcher. 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 a broader range of customers from higher-end business travelers to vacationing families seeking a discount, Lowrance said.

Enterprise, based in St. Louis, operates National Car Rental and Alamo Rent a Car, as well as its flagship Enterprise Rent-A-Car brand. Parsippany, New Jersey-based Avis has both the Avis premium brand and Budget Car Rental, which caters to leisure travelers. Leisure travel makes up 41 percent of the market in the U.S., according to IBISWorld.

Hertz’s original offer for Dollar Thrifty came in April 2010 and was $41. That prompted Avis Budget Group Inc., which had also considered a bid, to join the pursuit. Avis made its initial bid for Dollar Thrifty on July 28 and sweetened it twice. Dollar Thrifty’s board backed Hertz’s offer, deeming it the one most likely to clear antitrust hurdles.

‘Final’ Offer

Dollar Thrifty shareholders rejected what Hertz called its ‘‘best and final” offer in Sept. 2010 to buy the company for about $1.2 billion. The vote was about 13.8 million shares against the Hertz bid, versus 11.8 million shares in favor.

After the other aborted offer, Hertz said it planned to divest its Advantage brand to appease Federal Trade Commission concerns.

Antitrust experts said the FTC may scrutinize whether the merger will hurt competition in local markets, such as airports and train stations, where the combined company might gain more control of retail space.

“The government might want them to loosen up leases for space or spin off a lease in some situations -- for example if the merging firms dominate terminal space and everybody else is a shuttle bus away,” said Herb Hovenkamp, a professor and antitrust specialist at the University of Iowa College of Law in Iowa City. “I don’t see much here that suggests they would block it.”

Weight Lifted

Hertz shares rose 14 percent the day the original deal was announced in April 2010. Investors see the acquisition as an “extremely positive” development for Hertz, Lowrance said.

“I think what you’re seeing today is the lifting of the merger-overhang that was weighing on shares of all the industry players,” he said in an interview.

Avis in October 2011 acquired Avis Europe Plc, a month after ending its formal pursuit of Dollar Thrifty. Avis saw it as getting too expensive, according to the person familiar with the situation.

While Hertz reaffirmed in a July 31 statement that it still was interested in an acquisition, Dollar Thrifty CEO Thompson said the next day Hertz should make a “compelling offer” or end the process.

Dollar Thrifty contacted Avis Budget Group Inc. last month to solicit a new offer, a person with knowledge of the matter said at the time. Avis declined, the person said.

Relative Value

The Hertz bid for Dollar Thrifty, at 3.63 times earnings before interest, taxes, depreciation and amortization is more expensive than Avis’ acquisition of the European business, which went for 2.97 times Ebitda.

In recent weeks, Hertz began soliciting Dollar Thrifty shareholders to gauge their selling price, according to three people with knowledge of the process. Hertz also asked investors if a hostile bid should be pursued, said one of the people.

The final offer was approved unanimously by the two boards. Now a majority of Dollar Thrifty shares must be tendered for the deal to proceed.

Breakup Fees

The transaction doesn’t include breakup fees, people familiar with the negotiations said. That means that Hertz wouldn’t have to pay Dollar Thrifty if antitrust regulators block the transaction, and Dollar Thrifty wouldn’t have to pay if it took a higher offer from a third party.

The terms of the deal allow Dollar Thrifty to solicit a higher offer for 30 days, the company said in filing.

“We’ll be a stronger global competitive player with a full range of rental options not only in the U.S. but in Europe and other markets given Dollar Thrifty’s strong international presence,” Frissora said in the statement. “We look forward to moving efficiently and swiftly through the regulatory process having reached an agreement to divest our Advantage brand.”

Thompson’s Payout

Thompson stands to profit personally from the transaction, especially because of options granted to him when the stock price was much lower. Based on Thompson’s holdings as of an April filing, his stock and options would be worth $59.4 million at the takeover price.

If he loses his job because of the deal, he’s also entitled to benefits including about $10.4 million in severance, $6.5 million in performance shares and a $5.8 million tax “gross up,” Dollar Thrifty said in the April filing.

Hertz was advised by Lazard Ltd., Barclays Plc, Bank of America Corp. and Deutsche Bank AG, while Cravath, Swaine & Moore LLP, Debevoise & Plimpton LLP and Jones Day LLP acted as legal advisers. JPMorgan Chase & Co. and Goldman, Sachs & Co. advised Dollar Thrifty, with Cleary Gottlieb Steen & Hamilton LLP acting as legal advisers.

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