You arrive at the counter planning to drive away in a cheap little compact. The nice young lady behind the desk points out that she can get you into that Mustang convertible for a few dollars more. What the heck. You only live once (and the company is paying anyway).
Hertz and its investors have been upsold in a similar fashion, but they seem happy enough about it. News that the rental car company would pay $87.50 a share for Dollar Thrifty, more than twice its initial offer in April of 2010, was greeted with a racy 11 per cent jump in the share price.
The surge results from more than a little wind in the hair. The $160m in cost synergies the companies expect are, capitalised, worth perhaps $1bn. That is not enough to cover the $1.4bn increase over the first offer – let alone the premium that offer included. But Dollar’s earnings before interest, taxes, depreciation and amortisation have increased 70 per cent, to $350m, in the intervening years. And the multiple of those earnings that Hertz is paying by shelling out an enterprise value of $2.3bn for Dollar is about equivalent to that at which its own shares trade. The combined company’s debt ratios should be only a bit higher than Hertz’s at present. That Mustang, as it turns out, was not too bad a deal.
Both Hertz and rival Avis Budget have outperformed the S&P during the past two years (even before today’s pop at Hertz). Further consolidation, however, is unlikely to help that trend continue much. In the US, where the combined group will earn more than two-thirds of its revenue, the deal eliminates the number four competitor. But the top three (Hertz, Avis, and privately held Enterprise) already accounted for 87 per cent of the US rental fleet, according to ANR data. How much things will change when that figure rises to 93 per cent remains to be seen. Drive carefully.
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