Phew, Hertz didn't pay a billion dollars for nothing

Aaron Pressman

Just $999,200,000. Hertz and its leveraged buy out firm owners, Clayton, Dubilier & Rice, Inc., The Carlyle Group and Merrill Lynch Global Private Equity, filed to take the rental car giant public last Friday. Looking over the prospectus while awaiting news on another story, this looks like one sweet company filing for one ugly IPO. Like far too many of the recent reverse LBOs this year, Hertz borowed $1 billion on June 30 "for the purpose of paying a dividend to the holders of our common stock and paying fees and expenses related to the facility." Gee, how much was that dividend? $999,200,000. I guess related expenses on big loans have really come down.

Next on the ugly list, the current version of Hertz was formed less than a year ago by the LBO which bought the company from Ford. So financials for the resulting heavily recapitalized beast are a bit of a mishmash. But cut through all that and you discover that in the first quarter of 2006, the company had a net loss of $49.2 million versus a profit of $20.9 million a year earlier even as revenue jumped 9% to nearly $1.8 billion. How so? Thanks to an interest expense of $210.3 million -- more than double the expense from a year earlier -- and that's presumably before the interest payments on the June 30 special dividend of $999.2 million. For all of 2005, revenue was $7.5 billion, up 12%, and net income was $350 million, down 4%. Cash flow from operations totaled almost $1.5 billion but that was down 35% from 2004.

Strike three for me? You're talking about a company whose fortunes are closely tied to the ailing U.S. car industry. Higher car acquisition costs are already biting, as per-car depreciation costs rose 17% in the fourth quarter. And there's the possibility of a lower take when Hertz sells those cars a year or so later if the car makers decide to end the practice of guaranteeing to buy back everything at a prearranged price. Maybe if Cendant ever decides to take Avis public they will try harder.