U.S. FTC Said to Probe Macquarie’s Operation of Advantage
U.S. antitrust regulators are investigating whether Macquarie Group Ltd. (MQG)’s private-equity arm violated a consent decree allowing it to buy the Advantage rental car brand from Hertz Global Holdings Inc. (HTZ), two people familiar with the matter said.
Macquarie, in a joint venture with Franchise Services of North America Inc., bought Advantage from Hertz under a Nov. 15 agreement with the U.S. Federal Trade Commission that let Hertz buy Dollar Thrifty Automotive Group Inc.
The deal bolstered Hertz’s position as the second-largest U.S. rental-car service, behind Enterprise Holdings Inc. Avis Budget Group Inc. (CAR) is third. The FTC, concerned about the major chains shrinking to three from four, demanded that Hertz sell locations, recreating a fourth competitor after Dollar Thrifty was absorbed and moderating the prices people pay to rent cars at airports.
The agency is now concerned that Macquarie isn’t following through on commitments it made to expand and strengthen Advantage, said the people, who asked not to be named because the probe is confidential. FTC officials, who haven’t given a final sign-off on the transaction, were troubled by Macquarie’s Dec. 7 ouster of Sanford Miller, an industry veteran who was to run Advantage under the agreement, the people said.
“We have been responding to FTC questions and working with commission staff, and we believe the FTC will sign the consent decree in the near future,” said Richard Broome, a spokesman for Park Ridge, New Jersey-based Hertz.
Peter Kaplan, a spokesman for the FTC, declined to comment on the matter. Paula Chirhart, a spokeswoman for Sydney-based Macquarie, also declined to comment.
People in the FTC’s compliance office are deciding whether the Advantage transaction needs to be scrapped or restructured to ensure the new company can compete with its larger rivals, said the people, who asked not to be named because a final decision hasn’t yet been made. The larger Hertz-Dollar Thrifty transaction probably won’t be challenged by the agency, the people said.
Possibilities include bringing in another buyer and ordering Hertz to divest more locations, said the people. Evidence that investments in the new company were scaled back and that rental car prices are rising is fueling the FTC’s concerns, the people said.
The FTC could go back to Hertz and ask them to divest more locations to give some more scale to the Advantage brand, said Fred Lowrance, senior research analyst with Avondale Partners LLC in Nashville, Tennessee. Still, an investigation of Macquarie shouldn’t worry Hertz investors, he said.
“If you run all the reasonably plausible scenarios, there is no material impact to Hertz earnings,” said Lowrance. “Maybe Hertz would need to help them find another buyer, or add a few locations to the divestiture package, but nothing that’s likely to have any impact on the Dollar Thrifty merger itself.”
Almost five months after the FTC announced a consent decree with Hertz to allow the merger, the agency hasn’t issued a final order. Under normal FTC timelines, the consent decree would have gotten final approval in December 2012 after allowing 30 days for public comments.
“The fact that the FTC hasn’t approved the transaction after such a significant time frame means there are probably serious concerns being raised,” said David Balto, a Washington-based antitrust attorney who represents consumer groups and isn’t involved in the transaction. “They can reject the consent order if they want to or force them to restructure it.”
Miller, who was supposed to run Advantage, was forced out five days before the acquisition closed and replaced by his co-chief executive officer at Calgary-based Franchise Services, Thomas McDonnell. No reason was given, other than what Franchise Services in a Dec. 7 statement called a desire to “streamline the company’s executive management.”
Miller, the former CEO of Budget Group Inc., declined to comment on the FTC matter.
While agency staff members raised concerns about the strength of the buyer and its ability to become a viable competitor at the time, those questions weren’t deal-breakers with regulators, people familiar with the matter said at the time.
The FTC said it ordered Hertz to divest 29 Dollar Thrifty rental-car counters in addition to the Advantage business to protect consumers, citing the $11 billion spent to rent 50 million vehicles at U.S. airports each year. Without the divestitures, the merger would have hurt competition at 72 airports around the U.S., the FTC said at the time.
“This is a real pocketbook issue for everyday people,” then-FTC Chairman Jon Leibowitz said in a statement announcing the November agreement. “Today’s bipartisan action by the FTC will ensure that consumers are not forced to pay higher prices for rental cars when they travel.”
Only three months later, Hertz was reporting that daily rental revenue at airports had climbed 1.6 percent in December and 6 percent in January. Its newly acquired Dollar Thrifty unit also saw “positive year-over-year pricing in recent months,” Hertz CEO Mark Frissora said on a Feb. 25 earnings conference call.
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. Hertz made another offer last year that it later withdrew, citing market conditions.
Together, Hertz, Dollar Thrifty, Enterprise Rent-A-Car and Avis Budget control about 98 percent of total airport car rentals in the U.S., the FTC said in the November statement announcing the consent decree.