Hertz Fix in Dollar Thrifty Deal Fails as Insider Warned
To preserve competition in the rental car business when No. 2 Hertz wanted to buy No. 4 Dollar Thrifty, U.S. regulators had a fix. Industry veteran Sandy Miller warned them it would blow up. He was right.
Miller had an inside view. When the Federal Trade Commission gave preliminary approval for the deal a year ago, it demanded Hertz spin off its Advantage Rent A Car business to a firm where Miller, 60, would be chief executive officer.
Less than a month later, the company, now 49.76 percent owned by Macquarie Capital, fired Miller. He began warning the FTC not to give final clearance for the purchase, saying its plan to stand up an effective competitor to Hertz would founder on a management that lacked sufficient industry know-how.
On Nov. 5, four months after the commission closed its investigation and signed off on the acquisition, Advantage filed for bankruptcy.
“What a screw-up,” said Allen Grunes, an antitrust lawyer at GeyerGorey LLP in Washington who wasn’t involved in the matter. “It’s a huge embarrassment that it happened this quickly.”
The bankruptcy of Advantage shows how hard it is to recreate competition after mergers in concentrated markets, said Grunes, a former attorney with the Justice Department’s antitrust division.
Tom McDonnell, the chief executive officer of Advantage’s parent company, denied that the company’s bankruptcy means the FTC’s plan has failed. Advantage continues to operate and plans to sell itself to a new buyer.
“There is new capital committed to the company and we think Advantage emerges from bankruptcy stronger, from a balance sheet perspective, than it has ever been,” he said in a phone interview.
In the past year, the three rental-car companies, which dominate the airport market, have raised prices at the fastest pace since the recession. Hertz increased prices 2 percent in the U.S. in the third quarter. Avis, which boosted prices twice in North America in June, said “positive pricing trends” in the first half of the year continued in the third quarter as it reported record quarterly earnings in October.
The FTC’s options are limited to the “radical step” of suing to undo the merger, said Seth Bloom, president of Bloom Strategic Counsel, a Washington-based firm that provides antitrust and public policy analysis.
“Short of that there’s really nothing they can do,” he said. “The transaction has closed.”
Harry First, a law professor at New York University, said the bankruptcy of Advantage should serve as lesson to antitrust regulators.
“This should strengthen enforcers’ resolve to just say no to some mergers and not always try to look for a settlement,” he said. “They’re hard to effect and don’t always reach the goals that enforcers want.”
From the start, Hertz Global Holdings Inc. (HTZ)’s proposed $2.3 billion purchase of Dollar Thrifty Automotive Group Inc. raised antitrust concerns at the FTC. The deal would cut the number of major rental car companies from four to three -- Enterprise Holdings Inc., the biggest, Hertz and Avis Budget Group Inc. (CAR) With the smaller Dollar Thrifty, they controlled about 98 percent of airport car rentals in the U.S., the FTC said last November.
To curb the remaining companies’ pricing power, the agency ordered Hertz to sell its Advantage brand to Franchise Services of North America Inc. (FSN), which is almost half owned by Macquarie Group Ltd.’s Macquarie Capital. (MQG) Franchise Services deployed smaller brands such as U-Save Car & Truck Rental and Rent-A-Wreck of Canada. The divestitures protected competition at 72 airports around the U.S., the FTC said in giving the acquisition preliminary approval on Nov. 15, 2012.
The agency expected Miller, the co-chief executive officer of Franchise Services, to stay on and run Advantage as CEO, according to its consent decree with Hertz. Macquarie was to finance the company while Miller, a former CEO of car-rental company Budget, would provide the industry knowledge, said Bob Doyle, Miller’s lawyer at the Washington law firm of Doyle, Barlow & Mazard.
On Dec. 6, less than a month after the FTC gave preliminary approval to the Advantage spinoff, Franchise Services’s board of directors fired Miller. In a lawsuit filed in federal court in Mississippi, the company accused him of misconduct related to use of company funds and the attempted sale of property he owned to an entity involved in a transaction with Franchise Services.
Miller, who has denied wrongdoing, claimed Macquarie engineered his ouster to take control of Advantage, according to a suit he filed against the investment bank in New York State Supreme Court. While Macquarie had no seats on the Franchise Services board at the time, one of the investment bank’s managing directors told board members it would walk away from the Advantage investment if Miller wasn’t terminated, according to the complaint.
Paula Chirhart, a spokeswoman for Sydney-based Macquarie, declined to comment on the company’s actions in the Advantage deal. Macquarie has asked a judge to throw out the complaint.
Miller and his lawyers complained to the FTC that his termination violated a management agreement that was part of its preliminary approval of the deal, and urged the agency to reject Macquarie as the buyer before allowing the transaction to be completed.
In memos and meetings with commissioners and staff, they warned Advantage was doomed to fail under Macquarie, Doyle said. They argued that McDonnell, Miller’s replacement, lacked the operational experience needed to run a large car-rental business, he said.
Advantage was also mismanaging its fleet of more than 20,000 rental cars leased from Hertz and was unable to increase market share, according to a presentation they made to the FTC. They predicted Advantage would fail in 2014 without additional financing. Meanwhile, prices were rising for consumers, they told the commission.
McDonnell said he has been in the car rental business since the early 1990s. Advantage also brought on as president Bill Plamondon, a former CEO of Budget with more than 40 years of experience in the industry, he said.
In any case, a company the size of Advantage “is bigger than one person and doesn’t succeed or fail based on who is sitting in the top chair,” he said.
McDonnell described Advantage as a startup that needed to raise capital after it lost money in its first year.
After an investigation of more than six months, the FTC gave final approval to the Advantage spinoff in July. Under terms of the consent decree, the commissioners could still have rescinded the sale and ordered the assets resold to another buyer.
“Our arguments were ignored and look what happened,” Doyle said about Advantage’s bankruptcy filing.
Advantage was unable to make or restructure a payment to Hertz for the leased cars while Hertz was demanding their return.
Before giving its final approval, the FTC had at least one possible alternative to Macquarie. Richard Branson’s Virgin Group Ltd., the travel and entertainment conglomerate, sent a letter June 7 to the FTC expressing interest in the Advantage assets.
Matthew Reilly, an antitrust attorney at Simpson Thacher & Bartlett LLP in Washington and former FTC litigator said “there are no guarantees” antitrust remedies will be successful.
“Both the FTC and the Justice Department do as much vetting and due diligence as they can, but sometimes remedies just don’t work as planned,” Reilly said.
Advantage, which filed for bankruptcy in 2008 before being bought by Hertz in 2009, plans to sell itself in bankruptcy once again. Catalyst Capital Group Inc., a Canadian private equity firm that specializes in distressed business, will act as the lead bidder at an auction of the company, Advantage said in a bankruptcy court filing.
“We’re obviously following what’s going on at the bankruptcy proceeding,” said Dan Ducore, assistant director of the FTC’s compliance division, which is charged with overseeing that settlement agreements are adhered to. “If FNSA or Macquarie sell the business within the first three years, that needs FTC approval.”
Peter Kaplan, a spokesman for the FTC, declined to comment further on the Advantage deal.
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