Dollar Thrifty Merger Makes Traders See Biggest Gain in America: Real M&A
Dollar Thrifty Automotive Group Inc. (DTG) shareholders may extract the biggest price increase of any takeover in America as Hertz Global Holdings Inc. (HTZ) and Avis Budget Group Inc. (CAR) vie for control of the car-rental company.
Dollar Thrifty, which has doubled in the past 13 months as Hertz and Avis each offered to buy the Tulsa, Oklahoma-based company, rose 10 percent above Hertz’s unsolicited bid announced yesterday. The gap is larger than any pending U.S. deal over $1 billion, according to data compiled by Bloomberg. Park Ridge, New Jersey-based Hertz offered $72 a share, 24 percent higher than Avis’s September proposal, after saying about seven months ago that $50 a share was its “best and final” bid.
Hertz may force Avis, which has been seeking antitrust approval to buy Dollar Thrifty for a year, to raise its offer for a third time and drive the bidding into the “low-to-mid $80s,” according to Avondale Partners LLC. The winner would get a company that is more profitable than either acquirer and emerge as the second-largest U.S. car-rental company, behind Enterprise Rent-A-Car Co. Dollar Thrifty’s owners stand to reap a windfall of more than $1 billion on a stock that was trading for under a dollar less than three years ago, the data show.
“There’s no reason to think there won’t be at least one, if not two, rounds of improved bidding,” said Bill Kavaler, senior special situations analyst at Oscar Gruss & Son Inc. in New York. “The market believes that Hertz, by making this bid, needs Dollar Thrifty more than they thought they did the first time around. That’s why the market smells blood. They need it, and if they need it they’re going to have to pay for it.”
Richard Broome, a spokesman for Hertz, said the current proposal gives Dollar Thrifty shareholders “fair value.”
Dollar Thrifty said in a statement yesterday that the board plans to “review and consider” Hertz’s offer and advised shareholders not to take action. Stephanie Pillersdorf, a spokeswoman for Dollar Thrifty, and Andrew Siegel, a spokesman for Parsippany, New Jersey-based Avis, declined to comment.
Shares of Dollar Thrifty jumped 14 percent to $79.27, the highest since the company’s initial public offering in 1997.
Hertz agreed to buy the rental-car operator for $57.60 in cash and 0.8546 share for each Dollar Thrifty share owned, valuing the bid at $72 a share on May 6.
After Hertz fell 1 percent to $16.68 yesterday, the deal was worth $71.85, less than Dollar Thrifty’s closing price. The $7.42 difference was the widest in percentage terms among all pending U.S. takeovers valued at more than $1 billion, data compiled by Bloomberg show.
Hertz said it expects to start an exchange offer for the shares next week and plans to close the deal before the end of the third quarter.
“People expect both companies to come back with higher offers,” said Nancy Havens-Hasty, president of Havens Advisors LLC, a New York-based merger arbitrage fund manager, which owned 200,000 Dollar Thrifty shares as of March 31. The stock trading higher than the offer price signals investors expect “a very vigorous bidding war.”
Shares of Dollar Thrifty have advanced 104 percent since it became a takeover target in April last year, boosting its market value to $2.29 billion, data compiled by Bloomberg show. That’s more than Avis, which is worth $1.94 billion. Hertz is the largest of the three with an equity value of $6.94 billion.
Dollar Thrifty has outgained its two competitors since slumping to a low of 62 cents in March 2009 as air travel and leisure spending plummeted during the worst U.S. recession since the Great Depression.
The company, which operates the Dollar and Thrifty brands, has about 629 locations in 52 countries, mostly in the U.S. and Canada. By bidding for Dollar Thrifty, Hertz and Avis are competing to secure the No. 2 spot behind Enterprise.
The nation’s four biggest car-rental chains generate 83 percent of U.S. car-rental sales, according to a report this month from IBISWorld, the Santa Monica, California-based industry researcher. Closely held Enterprise had a 40 percent share, followed by Hertz with 20 percent and Avis with 17 percent. Dollar Thrifty accounted for 5.6 percent of the industry’s sales, according to IBISWorld.
Hertz’s latest offer is at least the sixth attempt by either Hertz or Avis to buy Dollar Thrifty in the past 13 months, according to data compiled by Bloomberg. In April 2010, Hertz agreed to buy Dollar Thrifty for $41 a share in cash and stock, the data show.
The deal included a one-time dividend of $6.88 a share to be paid by Dollar Thrifty to its shareholders before the deal closed. Avis countered with an unsolicited cash-and-stock bid of $46.50 in July, which it then raised to $47.13 in September.
Hertz then boosted its terms to $50, which Avis exceeded with a $53 offer in September. Dollar Thrifty’s shareholders rejected Hertz’s bid on Sept. 30, a day after Avis added a breakup fee to its higher offer.
“Now Hertz is coming in and trying to screw things up for Avis,” Oscar Gruss’s Kavaler said.
Between the time Dollar Thrifty’s owners voted against Hertz’s $50 bid and its latest offer, Dollar Thrifty gained 39 percent to $69.69 as of May 6. The Avis bid is currently valued at about $57.88 a share, including the special dividend.
Hertz and Avis are competing for a company that had a 17 percent operating margin in the past 12 months, outstripping both potential acquirers. Dollar Thrifty also retained about 52 cents for each dollar of revenue after subtracting the cost of goods sold, a higher gross margin than either bidder.
Taking a Shot
Dollar Thrifty reported $131.2 million in net income last year and $45 million in 2009, as Hertz suffered losses each of those years. Avis made a $54 million profit in 2010 after losing money for four straight years.
“Dollar Thrifty is such a good, profitable business that if you have any shot at acquiring it you probably need to take that shot,” said Fred Lowrance, an analyst at Avondale in Nashville, Tennessee. “They see massive earnings and margins and they say, ‘Hmm. Wouldn’t it just be better to go out and buy that than spending the next several years trying to build that on our own?’”
Lowrance said shareholders expect another round of bids between Hertz and Avis that may push the offer price to the “low-to-mid $80s.”
Avis is still seeking antitrust approval to purchase Dollar Thrifty one year after it filed for a review with regulators. Avis may be ordered by the U.S. Federal Trade Commission to sell off parts of the combined company or spin off one of its brands, antitrust lawyers and industry analysts said in November.
‘Waiting and Watching’
Avis has said it was willing to sell parts of its business that generate as much as $325 million in annual revenue.
Hertz said it has held discussions with the FTC and has begun selling its Advantage brand to facilitate approval. Hertz acquired Advantage through a bankruptcy auction in 2009 after a drop in leisure travel.
“Certainly with Hertz saying they’d give up their brand Advantage, they have a higher probability of getting their antitrust approval through,” said Michael Shannon, who co- manages the $4.58 billion Merger Fund in Valhalla, New York, for Westchester Capital Management Inc., which owns about 7 percent of Dollar Thrifty.
“We’ve been waiting and watching for a long time now,” Hertz Chief Executive Officer Mark Frissora said on the conference call with analysts yesterday. “After hearing the earnings call last week, we realized that there was no progress. All the while we’ve been monitoring at the FTC and we thought, given the news of last week, the timing was right for us to go forward,” he said, referring to Avis’s and Dollar Thrifty’s earnings conference calls.
Both Hertz and Avis are rated junk, according to Bloomberg’s Company Credit Ratings. Hertz, which had $1.37 billion in cash at the end of the first quarter, plans to fund a portion of the purchase via the debt markets. Hertz reaffirmed its goal of achieving an investment-grade credit rating, the company said on the conference call.
“It remains to be seen what happens,” Westchester Capital’s Shannon said. “But it’s certainly obvious that both companies want Dollar Thrifty, that there’s a lot of value there, a lot of synergies, and frankly it’s a terrific deal for them.”