The gripping 17-month bidding war between Avis (NASDAQ:CAR) and Hertz (NYSE:HTZ) to buy Dollar Thrifty (NYSE:DTG) came to a crashing halt in September when Avis withdrew its takeover offer, paving the way for Hertz to seal the deal. My suggestion for Hertz investors is to sell your stock and drive on over to Avis. Self-restraint is a good thing.
Since the Sept. 14 withdrawal by Avis, Hertz has seen its stock drop by 24%, to $8.63, as of Oct. 4. This puts a value of $65 on its cash-and-stock offer for Dollar Thrifty, which is a 21% premium to its current price. Dollar Thrifty is more profitable than Hertz. Its acquisition would ensure Hertz remains the second-largest car rental company in the U.S., behind Enterprise.
Hertz needs Dollar Thrifty more than Dollar Thrifty needs Hertz, so the deal price is likely to go over $70 a share by the time it’s put to bed, costing upward of $300 million extra. Avis was smart to have withdrawn its offer, and although it has lost 24% since dropping the takeover, once the dust settles, Avis investors will thank their lucky stars it didn’t win the battle for Dollar Thrifty.
In an email defending a higher takeover price for his company’s stock, Dollar Thrifty CEO Scott Thompson recently suggested that one of the many things that make his company an ideal acquisition is its cash-rich balance sheet. As of Oct. 4, Dollar Thrifty trades at 3.4 times cash, compared to 4.8 times for Hertz and 1.6 times for Avis. At least in terms of cash, Avis appears to be the cheapest of the three stocks. Another quality Thompson trots out in defense of Dollar Thrifty’s stock is its significant operating cash flow.
Let’s see how the three compare.
Dollar Thrifty’s operating cash flow in the trailing 12 months is 36.6% of its revenue, while Hertz’s is 23.9% and Avis’ is 31.2%. I use revenue instead of income because Hertz profits are hard to find. Dollar Thrifty definitely would boost Hertz’s profitability, but at a price. Let’s say Hertz ends up paying $75 a share for Dollar Thrifty. The cash portion of the deal, assuming the stock portion remains the same, comes to a bit less than $2 billion, with most of the cost covered by issuing new debt. Total debt would jump 17%, to $13.7 billion. Its debt-to-equity ratio would climb to almost 600% and its annual interest expense would rise by approximately $132 million, to $900 million.
At a time when everyone is preaching debt reduction, this seems to be nothing more than empire building.
Avis is no peach, either. Its debt sits at $10.1 billion as of June 30, which includes additional amounts used to acquire Avis Europe for $1.8 billion. The deal makes strategic sense because it brings the Avis and Budget brands together under one roof globally. In addition, based on the latest six months ended June 30, the acquisition boosts revenues by 35% and pretax income by 17%. Enterprise, which also owns Alamo and National, has 40% of the U.S. market.
No one is going to knock Enterprise off its perch, so the battle for Dollar Thrifty became a fight for the No. 2 spot. I’m guessing that when it became clear to Avis management that it was going to take more than $70 per share to secure Dollar Thrifty, it started looking at the Europe acquisition as a cheaper and quite possibly better alternative. It’s now operating in 150 countries, including Germany, France, Britain and Spain, with yearly revenues of $7 billion. Europe won’t always be in an economic funk.
After the Avis Europe deal, Avis has approximately $2.62 in cash. If you back that out of its Oct. 4 stock price of $9.49, it’s trading at 3.9 times its 2012 earnings per share estimate of $1.76. Meanwhile, if you do the same for Hertz, its multiple is 5.3 times its 2012 EPS estimate of $1.33, and that’s before the Dollar Thrifty acquisition. Avis might have surrendered the battle, but I think it won the war.
As of this writing, Will Ashworth did not own a position in any of the aforementioned stocks.