Dollar CEO Seen Making $82 Million Scoring 141-Fold Gain

Hertz $2 to $87.50 Dollar Thrifty Bid Brings 141-Fold Gain
Dollar Thrifty now has the highest operating margin of the three public U.S. rental car companies, 21.7 percent of sales last year compared with 13 for Hertz and 13.6 for Avis Budget Group Inc. Photographer: David Paul Morris/Bloomberg

Six weeks in as chief executive officer of Dollar Thrifty Automotive Group Inc., Scott Thompson was facing a roomful of bankers who had loaned the rental-car company $2.5 billion and were having second thoughts.

“We’ve looked at it and we don’t think you deserve to survive,” Thompson recalls one of them saying at that November 2008 meeting. “He said, ‘There’s no reason to have a Dollar Thrifty in the rental-car business.’ Those were pretty complicated days.”

A month later, Hertz Global Holdings Inc. offered to buy the company for $2 a share, an early bid in what would lead to an exponentially pricey, half-decade pursuit. Since then, Thompson, who had come out of early retirement to fix Dollar Thrifty, cut costs and reworked the car-buying strategy. Profits returned in 2009 and have continued to grow. On Aug. 26, he agreed to sell Dollar Thrifty to Hertz for $87.50 a share.

From a low in March 2009 of 62 cents, that’s a 141-fold gain. Since that time, no stock in the S&P 500 or Russell 2000 has gained more. Apple Inc., the world’s most valuable company, rose sevenfold.

Thompson, 53, will benefit from Dollar Thrifty’s rise. He holds stock and options worth $59.4 million at the takeover price, after paying $2.52 million to exercise the options, according to figures in an April filing. If he loses his job because of the deal, he’s entitled to $22.7 million more in severance and performance shares.

“This guy came in when this thing was treading water and now somebody is taking it out for $2.6 billion,” Fred Lowrance, a Nashville, Tennessee-based analyst at Avondale Partners, said in a telephone interview. “I don’t think anyone has a problem with that. His interests were aligned with those of the shareholders and it worked out for them.”

Unusual Path

Thompson took an unusual path to Tulsa, Oklahoma-based Dollar Thrifty.

In 2004, at age 45, he stepped down as a founder and chief financial officer of Group 1 Automotive Inc., an auto-dealership group, to spend time with his ailing father. While he consulted and joined a few boards, he didn’t return to full-time work until he joined Dollar Thrifty as CFO in May 2008. When he was named CEO five months later, he negotiated what he calls an “eat-what-you-kill pay plan.”

“That was a conscious trade made at a time,” he said. “And, in hindsight, obviously we have outperformed our expectations. And because of that, the management team has done really very well -- but so, quite frankly, have all the debtors and shareholders.”

Dollar Thrifty’s closing share price the day Thompson took over as CEO in October 2008 was 97 cents and lenders wanted to liquidate the company that traces its roots to 1958, when it rented Volkswagen Beetles for $6 a day plus 6 cents a mile.

Action Plan

Thompson cut costs, starting with 400 jobs, or 6 percent of the workforce. The reductions skewed toward the executive suite, with senior management reduced by 30 percent, headquarters staff by 15 percent and workers in the airports and other local offices by 5 percent. That saved $15 million.

Lenders agreed to amend loan terms, which helped avert a delisting from the New York Stock Exchange after the company’s market capitalization averaged less than $25 million for 30 straight days.

Another major cost was cars. Rental-car companies buy them, rent them for a few months or a few years and then sell them, either back to the automaker or on the open market.

Dollar Thrifty bought most of its cars from the predecessor of Chrysler Group LLC, the automaker that spun it off into a public company in 1997, with agreements to sell the vehicles back at a predetermined price.

‘Risk Fleet’

Thompson, with his background in car retailing, renegotiated contracts with Chrysler so he could buy from other automakers. He also took on the responsibility of selling the used ones for whatever the market would bear, a strategy known as a “risk fleet” because the company no longer had a guaranteed buyer.

“They’d always looked at the risk side of the equation of owning a used car,” Thompson said. “Since we were former retailers, we were very comfortable with that risk and, in fact, owning a used car, we saw that as an opportunity.”

In 2008, the year before Thompson took over, vehicle depreciation costs were $539.4 million. By last year, that expense had been cut almost in half to $271 million.

“It’s a more complicated business model to run a risk fleet,” Thompson said. “But done well or even in an average way, you end up with much higher returns over a cycle. You’re not just playing a one-year uptick. Over time, it’s a much more profitable venture.”

Highest Margins

Dollar Thrifty now has the highest operating margin of the three public U.S. rental car companies, 21.7 percent of sales last year compared with 13 for Hertz and 13.6 for Avis Budget Group Inc. Both Hertz and Avis have said they’re using more risk cars in their fleet than they used to.

Dan Regan worked for Dollar Thrifty from 1995 through May, leaving as Thompson’s head of western operations.

“When he came through the door, of course, he didn’t understand car-rental operations,” Regan said in an interview. “Who would? That part of the business was tough. But his background in finance is extensive. Hand him a balance sheet and financials and he’s going to crush the business model and figure out its weaknesses.”

The acquisition of Dollar Thrifty may be the last combination of major U.S. car-rental companies that regulators will tolerate, said Lowrance, the analyst. Hertz, Enterprise Holdings Inc. and Avis 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.

Solid Second

Hertz’s $87.50-a-share offer is 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. Enterprise is No. 1.

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 the 2010 offer, Dollar Thrifty’s shares have more than doubled, compared with a 9.8 percent increase in the Russell 2000 Index. Dollar Thrifty has traded at a premium to the index on a price-to-sales ratio since early last year.

Prompting Avis

That April 2010 offer of $41 a share prompted Avis, which had also considered a bid, to join the pursuit. Avis made its initial public bid for Dollar Thrifty on July 28 and sweetened it twice.

While Dollar Thrifty’s board backed Hertz’s offer, deeming it the one most likely to clear antitrust hurdles, the directors and managers were eager to get a deal done with either bidder.

Dollar Thrifty was “actively expressing our dissatisfaction with running a company in play for almost a year,” Thompson said. “In September last year, we called out Hertz and Avis and said, ‘You guys know what you need to do get it done.”’

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

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

Pushing Hertz

After Hertz reaffirmed in a July 31 statement that it still was interested in an acquisition, Thompson said on an earnings conference call the next day that it should make a “compelling offer” or end the process. Thompson said in an interview he heard from Hertz CEO Mark Frissora soon after.

“Things really got going pretty heavy after my earnings call,” Thompson said.

The two sides began bidding about $10 apart, two people with knowledge of the transaction said. Hertz offered in the low $80s and Dollar Thrifty was holding out for the low $90s, said one of the people, who asked not to be identified because the negotiations were private.

The CEOs met in person only once during the negotiations, at a hotel at Chicago’s O’Hare airport, the other person said.

The terms of the deal allow Dollar Thrifty to solicit a higher offer for 30 days, the company said in filing. Hertz said Aug. 27 it expects the transaction to close in the fourth quarter.

“These companies know each other very well,” Thompson said. “This has been going on for five years. This is sixth time they’ve done due diligence on us. It was a very smooth process.”


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