Jan. 2 (Bloomberg) -- Avis Budget Group Inc., once a skeptic about car sharing services, agreed to buy short-term rental pioneer Zipcar Inc. for $491 million, signaling a shift in the industry to embracing drivers who don’t want to own cars.
With the Zipcar deal, Avis Budget becomes the latest company to pursue the fast-growing market for young, urban customers who want to rent cars by the hour, rather than owning their own vehicles. Enterprise Holdings Inc. and Hertz Global Holdings Inc., the two largest U.S. car-rental companies, have already rolled out offerings for such customers.
Avis Budget Chief Executive Officer Ron Nelson said he’d been “somewhat dismissive of car sharing in the past,” in a call with analysts today. He said he had a change of heart when he realized how much growth and profit potential there is in providing hourly rentals to “younger, more wired consumers” in big cities and on college campuses worldwide.
“With more city living, more expensive gas, with it being more expensive to insure and buy cars, car sharing is a long-term business rather than just a flash in the pan,” said Fred Lowrance, an analyst with Avondale Partners LLC in Nashville, Tennessee, who follows the industry. “This is a pretty big leapfrog Avis just took in terms of market leadership. Before this, Avis wasn’t fully committed to car sharing.”
Avis Budget’s about-face came after Zipcar, founded in 2000, projected its first annual profit this year, of as much as $4 million. Zipcar’s board agreed to Avis Budget’s bid of $12.25 a share, a 49 percent premium on the Cambridge, Massachusetts-based company’s Dec. 31 closing price. That is also a 32 percent discount to Zipcar’s initial public offering price of $18.
“From day one, Avis is going to have a profitable business,” Lowrance said. “When an opportunity like that comes along, sometimes you just change your mind.”
The acquisition, which will mostly be financed with debt, will pay off in less than a year and begin adding to earnings next year, David Wyshner, Avis Budget’s chief financial officer, said on the call. Avis Budget expects the deal to close in the first few months of this year.
Avis Budget projected the deal will generate $50 million to $70 million in annual earnings improvements and up to $20 million in yearly revenue growth for Zipcar. There’s also $20 million to $25 million in annual cost savings from combining the companies’ vehicle fleets, Avis Budget said.
“This is an operation which is growing very quickly and it’s going to be significantly more profitable with the synergies that we’re going to be able to deliver,” Nelson said of Zipcar.
Gimme Credit LLC today reduced its rating on Avis Budget’s notes to stable from improving because of the debt being used to finance the Zipcar deal.
Car Sharing Race
The offer from Parsippany, New Jersey-based Avis Budget has been accepted by holders of 32 percent of Zipcar’s shares, the companies said in a statement.
“By combining with Zipcar, we will significantly increase our growth potential, both in the United States and internationally, and will position our company to better serve a greater variety of consumer and commercial transportation needs,” Nelson said in the statement.
The acquisition also enables Avis Budget to take the lead in the car sharing race. Zipcar has more than 760,000 members and is active in 20 cities in the U.S., Canada and Europe, the companies said today.
“Hertz and Enterprise seem to have an interest in getting bigger in the car sharing space,” Avondale’s Lowrance said. “Avis probably thought they would lose some business to their peers if they didn’t have something.”
Closely held Enterprise last year acquired Mint Cars On-Demand, an hourly car-rental firm with locations in New York and Boston. Hertz said last year it planned to equip its entire 375,000-vehicle U.S. fleet for hourly rental.
Avis Budget saw Hertz last year acquire Dollar Thrifty for $2.6 billion, solidifying Hertz’s No. 2 spot behind Enterprise, which operates the Enterprise, Alamo and National brands. Revolution Living LLC, the fund started by America Online Inc. co-founder Steve Case, was among Zipcar’s early investors, backing the business model when it was still in its infancy in the mid-2000s.
“Zipcar will certainly benefit from Avis’ experience and scale of operations with everything to do with the fleet -- from acquisition, to maintenance, and disposal of the vehicles,” Robin Chase, a co-founder of Zipcar, said in an e-mailed statement.
Zipcar surged 48 percent to $12.18 at the close in New York. The shares gained 17 percent from Nov. 19, the day before Hertz said it had closed its acquisition of Dollar Thrifty, through Dec. 31. Avis Budget rose 4.8 percent to $20.77.
Prior to agreeing to the Avis offer, Zipcar’s board had received “expressions of interest from multiple parties,” Scott Griffith, Zipcar’s chief executive officer since 2003, said on the call. Griffith, who will remain in that post, declined to elaborate.
Case’s Revolution is Zipcar’s largest shareholder with a 16 percent stake as of Aug. 28, according to data compiled by Bloomberg. Case also personally owns 1 million shares, according to the data. Revolution acquired a stake in Flexcar in 2005, which Zipcar acquired in 2007.
Zipcar will proceed with plans to shift its headquarters to Boston, they said. Cambridge, the current headquarters site, is a Boston suburb.
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