What a Dollar Thrifty Buy Would Mean for Hertz
Eric is a member of The Motley Fool Blog Network -- entries represent the personal opinion of the blogger and are not formally edited.
A big name in rental cars might not get even bigger after all. The Federal Trade Commission could decide to stop Hertz Global Holdings (NYSE: HTZ) from acquiring Dollar Thrifty, (NYSE: DTG) reported Sara Forden and Mark Clothier at Bloomberg. Although this deal does require a few sacrifices by Hertz, this merger could still work in this rental car company's favor if it finds a way to gain FTC approval.
The Downside for Hertz
Hertz has a massive debt burden at $12.5 billion right now, and the acquisition would mean even more borrowing for this car rental company. Sarika Gangar, at Bloomberg, reported on Oct 1 that Hertz planned to borrow $1.2 billion to finance its Dollar Thrifty purchase. Dollar Thrifty has $1.6 billion in debt itself right now, which Hertz would take on with the acquisition.
Hertz could sacrifice a growth brand for the sake of the acquisition. Last quarter, Hertz benefited from the strong growth that its Advantage discount brand provided. A Seeking Alpha transcript of Hertz' 2Q 2012 earnings call shows that Advantage achieved 42% sales growth for the quarter. Hertz agreed to sell Advantage to gain FTC approval for its Dollar Thrifty buy. Franchise Services, which agreed to buy Advantage from Hertz, issued a press release on Oct. 18 reminding investors that the Advantage deal will only go through if the FTC lets Hertz buy Dollar Thrifty.
Avis (NASDAQ: CAR) could grab additional international market share while Hertz managers focus on negotiations with the FTC. On Oct. 29 Avis announced that it added 60 car rental operations this year in Spain under the Budget brand, according to a Globe Newswire press release.
A distraction for Hertz and Dollar Thrifty could also make it easier for Zipcar (UNKNOWN: ZIP.DL2) to expand overseas. The Fool's Isaac Pino explains that Zipcar obtained its own foothold in the Spanish market by purchasing Avancar, and now Zipcar has completely merged Avancar's offerings with its own services. If the FTC blocks the Dollar Thrifty acquisition, Hertz might consider buying Zipcar, because anti-trust regulators might have fewer concerns about a smaller acquisition.
The Upside for Hertz
Hertz would gain a greater United States market share edge over Avis if the deal went through. Lisa Brown, at St. Louis Today, reported on an IBISWorld study that shows Hertz controls about 19% of the United States rental car market, slightly ahead of Avis (NASDAQ: CAR) at 18.5%, while Enterprise dominates with 39% market share and Dollar Thrifty is the smallest major player at 5%.
The deal could mean higher domestic sales figures for Hertz. Hertz reported $5.41 billion sales from its United States operations in 2011, while Dollar Thrifty reported $1.42 billion in domestic sales. The two companies' combined 2011 sales figures sum up to $6.83 billion, 26% higher than Hertz' stand alone domestic sales.
Hertz achieved $2.9 billion in international sales in 2011. Dollar Thrifty's annual report gives a sales figure of $60.3 million for the Canadian stores the company controls, and notes that franchises outside of Canada and the United States were responsible for $14.2 million in sales. These figures result in 2.6% higher international sales for Hertz if the merger goes through, but Hertz might be able to achieve higher sales through the Dollar Thrifty brand.
Dollar Thrifty's franchise program provides revenue from rapidly growing international markets. According to Auto Rental News, a BRICData study estimated that 2012-2016 compound annual auto market growth rates would be 8% for Brazil, 16% for Russia, and 16% for China. The 2011 Dollar Thrifty annual report explains that 59 nations outside of the United States and Canada host Dollar franchises, and 75 nations host Thrifty franchises. Hertz could use the Dollar Thrifty brand to attract international customers who have limited car rental budgets while offering higher-end rental services under the Hertz brand.
Even though Hertz would add even more debt to acquire Dollar Thrifty, the logic behind the deal makes sense. Hertz' United States sales could show significant improvement, and the international Dollar Thrifty franchises could help Hertz expand overseas. Hertz would gain two strong car rental brands that could appeal to bargain hunters. Additional deal terms could change this equation, though, since the FTC might demand further concessions to approve the merger. With this much debt, Hertz doesn't look very appealing as an investment right now, but a Dollar Thrifty acquisition could help Hertz grow its way out of debt if Hertz uses Dollar Thrifty's assets effectively.
enovinson 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.If you have questions about this post or the Fool’s blog network, click here for information.