Avis gives Zipcar a faster lane to profitability
By Antony Currie
The author is a Reuters Breakingviews columnist. The opinions expressed are his own.
Avis Budget is giving Zipcar a faster lane to profitability. Selling to the mainstream car rental giant for $500 million means a 32 percent loss for those who bought shares in Zipcarâs 2011 initial public offering. But it will allow the car-sharing company to boost its margins by tapping into Avisâs underused fleet.
Zipcar may have started the shift to renting cars by the hour, with gasoline and most insurance costs included in the price. But it faces stiff competition from Avis rivals Hertz and Enterprise, which have built or bought their way into the same market and offer more services, like one-way rentals to airports.
On top of that, after more than a decade on the road Zipcar has yet to shift into the black. It may do so in 2012, but only with a measly $3.25 million of net income â representing a 1.2 percent net margin â according to Reuters estimates. Thatâs barely a quarter of Avisâs expected margin and less than a fifth of Hertzâs.
Coming into Avisâs garage should improve that. The traditional renterâs vehicles get more use during the week than at weekends. Conversely, Zipcar members â annoyingly dubbed Zipsters by the company â often need wheels most on Saturdays and Sundays for getaways and runs to Ikea. Equipping some of Avisâs cars with Zipcar technology and making them available at the weekend could boost revenue by up to $25 million a year, the two companies reckon.
Adding one-way rentals as well as expanding Zipcar locations could inject another $20 million into the top line. Combined and assuming no associated costs, that could add $30 million after tax to annual profit. Attributed solely to Zipcar in 2012, that would have equated to a racy 10 percent net margin. Factoring in another $25 million of expected cost savings would take that closer to 18 percent.
Thatâs too flattering to Zipcar, of course. A good portion of any benefit from sharing fleets would really belong to Avisâs existing business. Even allowing for that, though, the deal adds handy extra oomph to Zipcarâs engine. The upstartâs shareholders get some of that in the form of a 49 percent premium over the value of their shares on New Yearâs Eve. Avis shareholders arenât giving anything up, either â the anticipated cost synergies, with a present value after tax of $175 million, cover the takeover premium.