Hertz Seen Taking $200 Million Writedown on Aging FleetMark Clothier
One of the first tasks the next chief executive of Hertz Global Holdings Inc. faces is upgrading an aging rental car fleet that’s putting off customers and damaging the brand -- and may have cost Mark Frissora his job.
Hertz, pressured by some of its largest investors to address operational and accounting missteps, may face a $200 million writedown on its high-mileage fleet, according to an analysis by Bloomberg News. At $200 million it would be more than half of Hertz’s profit in 2013.
A poorly executed change in strategy left the company with older models that probably aren’t worth as much as Hertz hopes to sell them for. The “glut of aged vehicles” may require an impairment charge, according to a Morgan Stanley analyst note yesterday that didn’t estimate the value. Older models need more maintenance and service time, and they make bad impressions on high-end business customers, said Maryann Keller, an industry consultant and former director of Dollar Thrifty Automotive Group Inc.
“The unhappy part of it is actually much worse than the under-depreciation of the fleet,” she said. “The Hertz premium brand is in jeopardy and they have lost corporate accounts. You don’t put a bank vice president in a car with 50,000 miles and expect that they’re going to be happy.”
Hertz said Sept. 8 that Frissora, who was under pressure from unhappy shareholders, was leaving his chairman and CEO roles for personal reasons. Whoever succeeds him will also need to deal with a restive investor base. Hertz shareholders are meeting with Chairman Linda Fayne Levinson this week, advocating for the board to add industry veterans as directors.
They’re also urging the board to hire Scott Thompson, the CEO who sold Dollar Thrifty to Hertz in 2012, as the new chief, said investors who asked not to be identified because the meetings are private. They argue that with a strong position in a resurgent market, Thompson can get Hertz’s operations back in order to generate profit growth and raise the value of the company.
The company, based in Naples, Florida, appointed Brian P. MacDonald, hired in June as head of Hertz Equipment Rental Corp., to serve as interim CEO. Levinson, who was named independent lead director last month, was appointed nonexecutive chairman.
“There were issues across the organization and Frissora and the board had to be fielding plenty of calls from activist investors,” Fred Lowrance, a Nashville, Tennessee-based analyst at Avondale Partners LLC, said in an interview.
The board has begun a search for a permanent chief, the company said. Whoever gets the job will have a lot to do, including combining Hertz with Dollar Thrifty, expanding beyond airports and implementing technology initiatives, Adam Jonas of Morgan Stanley said in the note. This may require a new management team with an array of experience, he said.
The biggest challenge may be addressing that aging fleet.
As many as 200,000 of the 515,000 cars and SUVs in Hertz’s U.S. rental fleet have more than 35,000 miles (56,000 kilometers) of road use, estimated a person familiar with the fleet, who asked not to be identified because he isn’t authorized to speak for the company. That’s old for a premium brand such as Hertz, which counts on business travelers and corporate accounts as a source of steady revenue.
To sell those at current prices, especially at this point in the year when used-car values tend to slide, Hertz may have to take of loss of $1,000 per vehicle. That would put the cost as high as $200 million.
At one point last month, Hertz was offering 1,800 cars at auction in the U.S. and most of them were from the 2012 model year or before, said a person familiar with the sale. Of those, about 1,400 had more than 40,000 miles, with many exceeding 60,000 miles, said the person, who asked not to be identified disclosing proprietary data. Enterprise Holdings Inc. and Avis Budget Group Inc., for example, had no 2012 model year vehicles at auction and few 2013s, the person said.
In some cases, Hertz was asking $1,000 more than rivals were for similar vehicles with fewer miles, said the person.
“The fleet is very old, the miles are high and the consequences of running an old fleet are showing up at the counters,” Keller said. “We know there are accounting issues. Whether they are big or small, we don’t know. I can tell you there are also operational concerns. This is your peak travel season. This is your peak moneymaking quarter. This is a time when you should have ample product.”
Hertz starting running a so-called risk fleet a few years ago to take advantage of the rise in used-car prices as Enterprise and Dollar Thrifty had done successfully. Before that, it bought most of its cars from automakers that agreed to buy them back at a set age and price. By running a risk fleet, Hertz can profit when prices rise, but it has to deftly manage when to sell the cars or face significant potential losses, Keller said.
One example of poor service that will need to be improved happened last month, when Whitney Tilson, a vocal investor with a small stake, showed up at Hertz’s car-rental counter at the San Francisco airport with his wife and daughter to pick up a Kia for a long weekend to see friends and family.
He posted to YouTube a video of what he saw: Dozens of people in a long, snaking line early on a Friday afternoon. Tilson, a hedge-fund manager, saw similar lines when he returned the car, prompting him to send the link to Frissora.
“I hope that my concern -- namely, that you are destroying your great brand in an attempt to make your numbers in the short-term -- is unfounded,” Tilson wrote in the e-mail to Frissora.
Hertz rents cars under its namesake brand in the high end, serving many business travelers and featuring a few exotic models such as the Tesla Model S, Ferrari F430 Spider and Lamborghini Gallardo LP. Dollar and Thrifty are geared toward the leisure customer on holiday.
“I don’t understand why Hertz is putting its premium brand, Hertz, on discount websites rather than its lesser brands, Thrifty and Dollar,” he said in an e-mail interview.
Investors’ discontent with Frissora increased this summer after the company said accounting issues prevented it from reporting financial results from the first or second quarters and rendered unreliable its past three years of financial statements.
That frustration intensified Aug. 19 after the company withdrew its 2014 forecasts. The next day, investor Fir Tree Partners, which held 3 percent of Hertz’s shares, urged the board to replace Frissora because the firm disapproved of how he was running the car-rental provider. Fir Tree, which holds 13.8 million Hertz shares, said Frissora is responsible for accounting and management missteps that have weighed on the shares.
Then billionaire Carl Icahn said he wanted to meet with Hertz to discuss accounting issues and operational failures related to the company’s underperformance relative to peers and a “lack of confidence in management,” according to a corporate filing.
Hertz said it still intends to spin off its equipment-leasing business to focus on car rentals, creating two publicly traded companies. The transaction, intended to happen in the first quarter of 2015, may be delayed by the accounting review, Hertz said last month. The spun-off company, which MacDonald was tapped to run in June, will be called Hertz Equipment Rental Corp., or HERC, Hertz said in March.
The car-rentals business will keep the name Hertz and get cash proceeds of about $2.5 billion to pay down debt and support a $1 billion share buyback, Hertz has said.
Since its 2012 acquisition of Dollar Thrifty, Hertz has been unable to take advantage of the pricing power its consolidation wrought. While Avis has raised its outlook and seen its stock rise 58 percent this year through yesterday, Hertz had slipped 2.3 percent.
“Whatever the depreciation mistakes were, the bigger issue of it is really the damage to the brand,” Keller said.
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