Avis Is Under Pressure to Shake Up Its BoardBy
Hedge fund SRS Investment nominating three new directors
Rise of car-sharing, ride-hailing threatens rental business
Avis Budget Group Inc.’s top shareholder kicked off a proxy battle with the rental-car company’s board, citing its failure to meet financial targets and prepare the company for the transformation of the auto industry.
SRS Investment Management LLC nominated three new directors and said Chairman Ronald Nelson, a former Avis chief executive officer, should be replaced. The New York-based hedge fund, which owns almost 15 percent of Avis’s shares, said its board comprised mostly of current and past Avis executives and long-tenured directors needs to be shaken up.
“For nearly a decade, no movement has been made to refresh the legacy board despite the substantial change occurring in the mobility industry,” SRS said in a statement. Avis’s lead director Leonard Coleman said in response that management was disappointed to be “engaged in a costly and distracting proxy fight.”
Avis and rival Hertz Global Holdings Inc. are being pressured by the rise of the ride-hailing model championed by Uber Technologies Inc. and Lyft Inc. Automakers including General Motors Co. also are experimenting with car-sharing programs that compete with Avis’s Zipcar. These services are becoming legitimate alternatives for the business travelers and tourists that are rental companies’ core customers.
Avis has offered SRS more board representation and has clued the investor in on its process of selecting new directors. The company is searching for candidates with technology experience to replace retiring board members, Coleman said.
“It’s an old, stale board,” Hamzah Mazari, an analyst with Macquarie Capital Inc. in New York, said in a phone interview. “We think SRS wants Avis to get more tech savvy with connected cars. Our sense is they want someone from Google or Amazon on the board.”
Avis shares rose 3.7 percent to $40.25 as of 3:11 p.m. Friday in New York. The stock has slumped about 8 percent this year.
Tension between Avis and SRS has been building for more than a year. Avis adopted a plan in January 2017 that the company said would allow it to keep buying back stock while guarding against SRS taking control of the company. It’s returned more than $1.3 billion to investors since 2012 by repurchasing shares.
SRS agreed to a standstill provision in May that would keep the hedge fund from acquiring more stock.
Then, after months of Avis shares getting pounded by concerns about sagging used-vehicle prices hurting rental-car profits, the company struck a deal with Waymo -- the unit of Google parent Alphabet Inc. -- to manage a fleet of self-driving Chrysler minivans, spurring a rebound.
But the stock recovery, and efforts Avis has made to respond to disruptive threats by connecting its rental fleet with a mobile app, haven’t been enough to keep the peace.
On Jan. 15, Avis announced it had offered SRS an additional board seat and a chance to have input in the process of selecting directors.
SRS refused and asked for veto over any board changes and leadership decisions, as well as the ability to significantly increase its voting power. Avis responded by adopting a shareholder rights plan that prevents SRS from obtaining control of the company without paying a premium.
On Jan. 16, Avis reported that its 2017 results would be in line with guidance, with revenue rising to about $8.85 billion and pretax income of $205 million to $215 million. The company added that rising interest rates and other unspecified items would have some impact on results this year. The shares plunged 14 percent that day.
Avis said last month that it had offered SRS, which has been its largest investor for the past seven years, a chance to nominate a third director and to play a significant role in changing up its board. SRS has had representatives on the board for the last two years and has been supportive of Avis’s leadership team and plans, the company said.
But in its statement, SRS criticized Avis management for missing financial targets. The company has lowered sales or earnings forecasts four times since November 2016, according to data compiled by Bloomberg.
The hedge fund also said Avis’s board has “exhibited inaction and a startling lack of urgency” through the search process for a permanent chief financial officer. The company announced in May that David Wyshner, who held the position for more than a decade, would resign the following month. Martyn Smith, who has been finance director of Avis Europe, has been interim CFO since then.
“These failures can only be resolved by refreshing the board with a new chairman and independent directors who will hold management accountable,” SRS said. “The board needs the technology expertise required to navigate the rapidly evolving world of mobility.”
The new directors SRS said it will nominate for Avis’s board in a proxy filing are Jagdeep Pahwa, a president at the hedge fund; Carl Sparks, the former chief executive officer of Travelocity; and Matthew Espe, the former CEO of Radial Inc.