Thrifty Hertz knows value of a Dollar

April 26, 2010

Cross-posted from today’s NYT.

The car rental company Hertz has picked an aptly named takeover target. The $1.3 billion acquisition of a smaller rival, Dollar Thrifty, comes with just a 6 percent premium.

Moreover, Hertz is using some of Dollar Thrifty’s own cash to finance the deal and isn’t giving away the cost savings. Small wonder Hertz shareholders like what they see.

It’s true, Dollar Thrifty would have been a considerably bigger bargain a year ago. Its shares have skyrocketed from under a dollar last March to nearly $39 on Friday. Yet even at that price, its valuation lagged competitors. Stripping out the depreciation and debt on Dollar Thrifty’s vehicle fleet, the company’s enterprise value to estimated 2010 EBITDA was under five times, according to Goldman Sachs, compared to more than eight times for both Avis Budget and Hertz.

Some discount looks warranted given the company’s dependence on troubled automaker Chrysler, more tourists than business travelers as customers and a bloated cost structure. But as Chief Executive Scott Thompson has made progress on all of the above, Dollar Thrifty shareholders might have expected the shares to keep rising.

Instead, Hertz appears to be speeding off with Dollar Thrifty’s untapped value. First, Hertz is using a $200 million cash dividend from Dollar Thrifty’s balance sheet to fund some 16 percent of the deal. Second, the announced enterprise value of the transaction was $930 million. Hertz expects $180 million of cost savings from the combination. Taxed, discounted and put on Hertz’s own multiple, these are worth about $900 million. Basically, the deal pays for itself.

Normally a buyer’s shares fall on a takeover announcement since sellers tend to extract pricey control premiums. But Hertz’s jumped by 14.1 percent on Monday, outpacing Dollar Thrifty’s 10.7 percent gains.

The target’s shareholders must be wondering why they aren’t getting more. Indeed during a conference call question and answer session, an analyst from Citadel Investment Group — Dollar Thrifty’s third largest shareholder according to Thomson Reuters – argued with Hertz CEO Mark Frissora over the low valuation.

Hertz needs Dollar Thrifty shareholders to approve the deal. After offering so little, they may not get it.

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