Hertz’s Long Pursuit of Dollar Thrifty Wins FTC Approval
Hertz Global Holdings Inc. (HTZ)’s $2.6 billion purchase of Dollar Thrifty Automotive Group Inc. was cleared by U.S. antitrust regulators yesterday after almost a half-decade of trying and some late-hour concessions for regulators concerned the deal would limit competition.
Hertz agreed to sell 62 Advantage brand outlets along with the rights to operate 29 Dollar Thrifty on-airport locations, the U.S. Federal Trade Commission said in a statement. Sixteen of the airport outlets were part of the original deal between the companies, and the FTC demanded that 13 more be sold after the deal closes to maintain competition in those markets.
The acquisition solidifies Hertz’s place as the second- biggest in the U.S. rental-car market, ahead of Avis Budget Group Inc. (CAR) Enterprise Holdings Inc., which operates the Enterprise, Alamo and National brands, is the biggest. Giving Hertz two lower-priced leisure brands to balance its premium namesake brand is a positive for the industry, said Chris Agnew, a Stamford, Connecticut-based analyst at MKM Partners LLC.
“It’s good for balanced, rational competition for the main companies to have dual-brand strategies,” Agnew said yesterday in a telephone interview. “Hertz with only one main brand had created an imbalance.”
The FTC voted 4-1 in favor of approval after concessions by Hertz, made in talks over the past two weeks, to shed the additional locations to ease antitrust concerns as the market shrunk from four major companies to three, people familiar with the process said. Hertz may be able to keep Dollar and Thrifty counters at some of those airports, Hertz said in its statement.
Together, Hertz, Enterprise and Avis control about 75 percent of the market, with Dollar Thrifty holding 5 percent, according to a February report from IBISWorld, the Santa Monica, California-based industry researcher. No other competitor has more than 1 percent of this year’s $30.5 billion market in the U.S., according to IBISWorld.
Earlier in its negotiations with the agency, Hertz pledged to sell its 62 Advantage-brand outlets in the U.S. 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 has said. The sale is dependent upon Hertz completing the acquisition of Tulsa, Oklahoma-based Dollar Thrifty.
When Hertz announced the acquisition in late August, it said it expected at least $160 million in annual cost-savings and sales-growth potential. The moves to address the FTC’s concerns shouldn’t change the benefit of the deal for Hertz, Fred Lowrance, a Nashville, Tennessee-based analyst at Avondale Partners LLC, said in an interview.
“These concessions are not a needle-mover, for Hertz at least,” Lowrance said. “Maybe it was for the FTC and their view of what competition was like in the rental-car industry, but this doesn’t change the economics of the deal.”
The FTC alleged that the acquisition as originally proposed would have led to “substantially more concentration in 72 airport rental-car markets” and by eliminating head-to-head competition between Hertz and Dollar Thrifty.
“American consumers rent more than 50 million vehicles at airports nationwide each year, spending $11 billion, so this is a real pocketbook issue for everyday people,” FTC Chairman Jon Leibowitz said in the statement. “Today’s bipartisan action by the FTC will ensure that consumers are not forced to pay higher prices for rental cars when they travel.”
Commissioner Tom Rosch dissented, saying he found the divestitures “inadequate to resolve the competitive concerns at several dozen other airports,” according to the statement. Rosch said he would have challenged the transaction because of the “significant risk” it could lead to higher prices and disadvantage consumers in other ways through coordinated actions by the remaining industry players.
The four largest companies -- Enterprise, Hertz, Avis Budget Group Inc. and Dollar Thrifty -- have controlled 80 percent of the U.S. market, according to IBISWorld. Enterprise will command 38 percent of the $30.5 billion market in the U.S. this year, Hertz will have 18.9 percent, followed by Avis with 18.5 percent and Dollar Thrifty with about 5 percent.
The $87.50-a-share offer represents an 8 percent premium to Dollar Thrifty’s closing price of $81 (DTG) on Aug. 24. The price is more than twice the $41-a-share Hertz offered in April 2010.
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. While the FTC staff raised concerns about the strength of the buyer and its ability to become a viable competitor, those questions weren’t deal- breakers with regulators, the people said.
Hertz began its pursuit of Tulsa, Oklahoma-based Dollar Thrifty in April 2007 and made a formal bid of about $1.2 billion in 2010 that Dollar Thrifty shareholders rejected. Park Ridge, New Jersey-based Hertz made another offer last year that it later withdrew, citing market conditions.
Hertz, with 8,750 outlets worldwide, has more than 3,900 U.S. locations, while Dollar Thrifty has about 280 corporate- owned outlets in the U.S. and Canada.
Last month, Hertz extended the FTC’s legal deadline for ruling on the deal to Nov. 16 from Oct. 31 because the agency hadn’t finished its review of information provided by the companies, Hertz said in a statement. When Hertz announced the proposed acquisition on Aug. 26, it said FTC approval was expected by mid-October. People familiar with the deal said it ran into resistance from some of the agency’s staff and commissioners.
“The FTC requirement to add assets to the divestiture package demonstrates the importance of ensuring that all competition law concerns are resolved to obtain commission approval,” said William Vigdor, an antitrust lawyer with Vinson & Elkins LLP in Washington, who served at the FTC for six years.
Hertz and Dollar Thrifty said the transaction is 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 shares of common stock. The tender offer closes at 5 p.m. New York time.