Zipcar: Avis Makes a Smart Acquisition

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Shares of Zipcar (UNKNOWN: ZIP.DL2) were exploding higher by 48% on Wednesday after an acquisition offer by Avis Budget (NASDAQ: CAR) was announced. The rally in Zipcar is completely understandable considering that the price of $12.25 per share in cash means a premium of nearly 50% versus the previous closing price. But the real winner from this deal was actually Avis, which bought a high growth company at a conveniently low price.

Rationale for the Deal

The car rental industry has been consolidating over the last years. After the purchase of Zipcar, Avis will mostly compete with two big players, Hertz (NYSE: HTZ) – which recently acquired Dollar Thrifty for $2.56 billion – and privately held Enterprise Holdings.

Both Hertz and Enterprise holdings were already offering hourly rentals, so Avis had to do something about that in order to stay up-to-date on industry trends. By purchasing Zipcar as opposed to building the business from scratch, Avis starts with the right foot by eliminating a serious competitor in that space.

Hourly rentals are probably the future of the business, and it’s especially attractive among the young and urban population, so this acquisition gives Avis the possibility to get right in the center of a very exciting niche which would not be accessible for Avis on its own.

And not only that, Avis is also buying a unique position in the car sharing business, Zipcar is the most respected brand in that sector by a far distance, and it has a loyal customer base of nearly 800,000 members.  Avis is not just buying an entry into car sharing; it’s buying the pole position.

Zipcar will also get some important benefits from the deal; the company will have access to better financial conditions and lower vehicle costs by being part of a much bigger organization. Zipcar is also having trouble at providing enough cars during weekends, when demand is higher, and having access to a much larger fleet can be a very valuable asset when it comes to cars availability and inventory management.

Some cost reductions in areas like insurance and administrative expenses should be expected too, management estimates savings between $50 million and $70 million annually, so the deal makes sense both from a competitive and operational point of view.

The Price

Even at a 50% market premium, Avis is paying $12.25 per share for Zipcar, which is quite lower than the lPO price of $18 in April 2011. In fact, the stock was trading in a range between $14 and $16 a year ago, so the premium isn’t so large when seen in perspective.

More importantly, from a fundamental valuation point of view, Avis is paying 2 times sales for Zipcar, a very attractive valuation for a company with so many exciting growth opportunities. The acquisition is not only logical from a business point of view; Avis seems to be getting quite an attractive price for this deal.

The Risks

Zipcar and Avis target different kinds of customers, and they have different corporate cultures. The Zipcar brand has a very special identity among the young, environmentally concerned, demographic groups. There is a big risk of losing that identity if Avis goes too far with its operational integrations and cost synergies.

Zipcar customers value its conveniently located pickup points and friendly customer service. If Avis starts centralizing things and reducing the quality of the service, this could certainly backfire, as Zipcar customers have some very specific needs.

Costs savings are fine unless they start hurting the customer experience and damaging the value of the Zipcar brand. The two companies together provide some complementary advantages, but if Avis “swallows” Zipcar by imposing its own ways of doing things it will be making a very serious mistake.

Botton Line

The Zipcar acquisition looks like a smart deal, especially for Avis since it paid a very moderate price for the purchase. Unless they go too far with cost cuttings and hurt the value of the Zipcar brand, this move puts Avis in a privileged position to compete in the promising market of car sharing and hourly rentals.

acardenal has no positions in the stocks mentioned above. The Motley Fool owns shares of Hertz Global Holdings and Zipcar. Motley Fool newsletter services recommend Zipcar. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy. Is this post wrong? Click here. Think you can do better? Join us and write your own!

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