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Hertz To Buy Dollar Thrifty For $1.2B

27 April, 2010

Hertz Global Holdings Inc agreed to buy smaller rival Dollar Thrifty Automotive Group Inc in a $1.2 billion deal that will make it the second-biggest U.S. car rental company.

The deal, which has been in the works since November 2009, marks a significant consolidation in the car rental industry, just starting to recover from a downturn in the economy and the automobile industry in particular.

The deal is a sign of times where optimism about the recovery has reached a critical point and companies are looking ahead and not just trying to survive, said George Van Horn, analyst with market research firm IBISWorld.

“Even with some optimism on near-term conditions, consolidation pressures across many travel providers (airlines too) have increased as operators continue looking for ways to increase competitive advantage, reduce costs and improve efficiencies,” said Van Horn.

Shares of Hertz, which also raised its 2010 outlook, rose as much as 21 percent Monday to touch a two-year high of $15.60.

Dollar Thrifty’s shares, which rose as much as 12 percent, closed up $4.22 at $43.07, above Hertz’s offer price and implying that investors expect a higher bid. Shares of chief rival Avis Budget Group also rose 12 percent.

Hertz said the combined company would have an overall U.S. market share of 23 percent, trailing privately held Enterprise Rent-A-Car, which has a market share of 53 percent. Avis Budget has a 20 percent share.

“This is a very important and strategic transaction for us in that it fills a gap in our product portfolio with a strong mid-tier value offering,” Hertz Chief Executive Mark Frissora said on a conference call with analysts.

The company said the merger agreement requires it to divest certain units if the U.S. Federal Trade Commission determines that the deal would produce an unacceptable concentration in the market.

“We remain very, very confident that this deal would be approved,” a Hertz executive said on the call.

The deal is also subject to approval by Dollar Thrifty shareholders. There is about 66 percent to 67 percent overlap in top shareholders of both the companies, Hertz said.

T. Rowe Price Associates, Vanguard Group, BlackRock Institutional Trust Co and Fidelity Management & Research are some firms with stakes in both the companies.

Hertz sees savings of more than $180 million from the cash-and-stock deal, which values Dollar Thrifty at $41 a share — a 5.5 percent premium to the stock’s previous closing price.

Dollar Thrifty shares rose 12 percent on Monday to touch a three-year high of $43.56. They currently trade at 16.3 times forward earnings, an 8 percent premium to the company’s peers, according to Thomson Reuters StarMine SmartEstimates.

Rival Avis Budget said it does not expect the acquisition of Dollar Thrifty to have a significant impact on it at this point as it is already competing against these brands.

“The fact is the dynamic in our industry has not really changed as a result of this announcement,” said Avis spokesman Kevin Meyer. “The Hertz transaction reflects the nature of our highly competitive industry.”

Avis Budget already operates under a dual-brand strategy — one brand in the premium sector and another in the value sector — the kind that Hertz is trying to achieve through the Dollar Thrity acquisition.

Avis did not comment on whether it will make a bid for Dollar Thrifty.

EYEING BUDGET TRAVELLER

Hertz CEO Frissora said the deal would increase the company’s presence in the non-business segment in international markets including Europe.

Hertz, whose previous owners include Ford, UAL Corp, and Carlyle Group and partners, had earlier talked about the need to diversify away from its core on-airport rental market to the off-airport market dominated by rival Enterprise.

The combined company would have a market share of about 38 percent at the 190 largest U.S. airports, ahead of Enterprise’s 31 percent and Avis’s 29 percent.

Last year, Hertz acquired some assets of smaller bankrupt rival Advantage Rent A Car to expand its presence in the U.S. leisure rental market.

From 2007 through 2009, Hertz increased its number of off-airport rental locations in the United States by about 7 percent to some 1,700.

Analyst Van Horn said Hertz would gain a lot of operational flexibility in managing multiple brands that appeal to different traveller segments.

In a separate statement, Hertz raised its adjusted earnings outlook for 2010 to a range of 43 to 45 cents a share.

Hertz expects the deal, comprising 80 percent cash and 20 percent stock, to immediately add to its annual adjusted earnings when completed.

At closing, Hertz will issue about 18 million shares of its common stock and pay about $750 million in cash, excluding a special $200 million Dollar Thrifty dividend.

Barclays Capital acted as lead financial adviser to Hertz, while Dollar Thrifty was advised by JP Morgan and Goldman Sachs.


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Hertz To Buy Dollar Thrifty For $1.2B

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