The long and winding road
That leads to your door
Will never disappear
I've seen that road before
It always leads me here
Lead me to your door.
It wasn't the best Beatles' song, but it's apropos for Hertz's courtship of Dollar Thrifty Automotive Group. Since the first deal fell through last year, the Long and Winding Road includes Hertz's purchase of a leasing company and Avis Budget Group's bid for Avis Europe. With this new activity, it's time to reassess the landscape and see how close - or how far away - we are to the final major consolidation in North American car rental.
The Hertz deal to buy Donlen - a top 10 U.S. fleet leasing and management company - gives Hertz an immediate foothold in commercial leasing and brings them potential synergies enjoyed by the Enterprise brands and its fleet leasing division. (Donlen leases and manages more than 144,000 units, while Enterprise's 2010 portfolio is listed at about 261,000 units, according to our 2011 Automotive Fleet Fact Book.)
Hertz can lever Donlen's network of about 5,000 maintenance repair facilities for insurance replacement work. Donlen can now go to their accounts with an integrated soup-to-nuts transportation solution, including equipment rental. Hertz will give Donlen better cost of capital, better fleet financing and diversified fleet disposition channels.
This deal makes a lot of sense. Hertz needs to invest where it can grow, which is locally and the airport leisure market. The Donlen deal speaks to the former, and the looming Dollar Thrifty deal to the latter. The Donlen acquisition does not sidetrack Hertz's pursuit of Dollar Thrifty, as Avis Budget Group's tie-up with Avis Europe seemingly has. The question is: Are we any closer to a Hertz/Dollar Thrifty deal?
As always, there are many moving parts to disentangle. Hertz needs to find an Advantage buyer, comply with the FTC and structure a deal that will work with Dollar Thrifty's board of directors as well as its major shareholders.
Timeline, What Timeline?
As of now there are no formal agreements in place involving any party. In mid-July Hertz filed a Hart-Scott-Rodino notification, which is a step in the process to allow the federal antitrust authorities to vet the Dollar Thrifty deal. The notification requires a 30-day waiting period, after which regulators may request more time to review additional information. The filing is standard procedure and not necessarily contingent upon having an Advantage buyer in place, though it's a step in the right direction to show Hertz wants to make a deal.
After approval of the HSR, then Hertz will approach Dollar Thrifty's board and try to talk to Dollar Thrifty's major shareholders at the same time to see what price works. The outcome of this process would take a couple of months if everything got going today.
When it comes to a Federal Trade Commission (FTC), ruling if you're like me, you've been scratching your head and thinking, "What's taking so long?" Know first that the FTC asks all the questions and has no obligation to announce its rulings publicly.
But what pound of flesh does the FTC want for a Hertz/Dollar Thrifty merger? Is it a market-by-market divestment of revenue if the combined company controls more than 45 to 50 percent of the airport business? Divesting Advantage is certainly part of the deal, but will Hertz have to give up airport desks in any given city?
Meanwhile, Hertz has yet to announce a buyer for Advantage, though the suitors have been narrowed down from many to a few or even one. The FTC will review the Advantage buyer as well, which could lengthen the timeline. The FTC will want assurances that the buyer is committed to keeping and growing Advantage as a viable car rental brand. Also, as Advantage is only "near airport" in many markets, the FTC is apparently asking Hertz as part of the divestiture package to allow Advantage on-airport counter space in certain markets. The FTC, it seems, wants Advantage around.
Another wrinkle: Hertz won't sell Advantage and hope that a Dollar Thrifty deal will go through. Being able to close the Dollar Thrifty deal is contingent upon Hertz's ability to sell Advantage, and selling Advantage is contingent upon having a signed merger agreement and shareholder approval from Dollar Thrifty.
This means we'll most likely encounter a flood of information all at once: a merger deal, an Advantage buyer and any FTC ruling outcomes, if Hertz or Dollar Thrifty cares to divulge.
Getting it Done
That leaves us with our final question (at least for now). Will a deal get done?
In terms of FTC approval, the players in this process have been expending resources for more than a year, and judging by the fact that the process is continuing shows that the outcomes are at least workable. The consensus on an FTC ruling is that Hertz should have an easier threshold to pass than an Avis Budget deal on combined market shares at airports. But the devil, as they say, is in the details.
There is no time lock on completing a deal to sell Advantage, but you would think Hertz would be intent on getting Advantage off its books to be able to move on to bigger fish.
The next order of business is coming up with an acceptable share price for a deal. The money guys get paid the big bucks to understand the multiples to earnings to come up with a fair share purchase price.
In Wall Street-speak, Hertz is looking to close the transaction that is reasonable and "meaningfully accretive on an earnings basis." Hertz wants to show their investors they didn't overpay and will add to earnings in year one. On the other side, the Dollar Thrifty board of directors and shareholders are looking for the highest price possible, though those two entities often don't agree.
You might think that because Avis is busy acquiring Avis Europe, Dollar Thrifty is at a disadvantage in any deal negotiations. But Dollar Thrifty still has some cards up its sleeve to leverage a higher price out of Hertz - mainly little debt and a ton of cash, which they could use in a large share repurchase to drive up the stock price.
Also, Avis Budget Group is not necessarily out of the picture. In nine months they will have completed the Avis Europe purchase, at which point there's nothing stopping the new entity from returning to the table.
One analyst contends that with all the potential synergies Hertz doesn't overpay until north of $100 per share, acknowledging that Hertz would never pay that. There is consensus that a range of $75 to $80 a share may get past the Dollar Thrifty board, though the shareholders are a different story. Shareholders who got in at the $50 to $60 range last year - when a deal didn't get done - will have made some good money at this point at $80 a share.
"There will be a very tight range of acceptable share prices to both sides," says one analyst. "It's a matter of getting people there." Nonetheless, consensus says a deal is more likely than not. But once again, the question is when.