A Lot of Synergies for This Car Rental Business

Anh is a member of The Motley Fool Blog Network -- entries represent the personal opinion of the blogger and are not formally edited.

Avis Budget (NASDAQ: CAR) announced that it would buy Zipcar (UNKNOWN: ZIP.DL2) for nearly $500 million, or $12.25 per share, marking a 49% premium on its recent Monday close price. However, the price tag was much lower than its IPO price of $18 per share in the second quarter of 2011. Since the IPO, Zipcar kept declining to as low as $6.50 in October. Is this a good deal for Avis? Should investors begin to consider Avis for their portfolios after the deal?

Leader in Car Sharing Business

Zipcar, founded 13 years ago, is known to be the world’s leader in car sharing business. The company currently had around 760,000 members, known as Zipsters in 20 cities in the US, Canada, the UK and Spain. Zipcar is indeed the leader in the car-sharing industry. Hertz Global (NYSE: HTZ), takes the second spot with only 160,000 members, one fifth of Zipcar’s.  Zipsters receive the self-service cars in reserved parking places in the areas that they live, work, and study. Zipcar charged hour or daily rates including insurance, gas and other costs attached with car ownership. Thus, it was a quite convenient for members to use Zipcar. The pioneer in the car sharing industry has said that the car-sharing market could potentially reach $10 billion in North America, Europe and Asia.

Huge Growth on Decent Balance Sheet

Since 2008, Zipcar has grown its top line significantly, from $106 million in 2008 to $242 million in 2011, whereas Hertz has been struggling with the fluctuation in sales. However, in the same period, it only could generate operating losses. The losses were partly due to the increasing in its Sales, General and Administrative. In 2008, its SG&A accounted for 23.9% of the total sales, and it has increased to nearly 31.7% in 2011. As of September, Zipcar booked $232 million in total stockholders’ equity, $65 million in cash and short-term investments and $115 million in capital leases, or 27% of the total assets.

A Lot of Potential Synergies

The acquisition of Zipcar would let Avis expand significantly in the car sharing market, which is experiencing fast growth, adding a huge member base into the company’s customers; in addition to the Avis and Budget brands with operations in around 175 countries globally. Zipcar, in turn, could accelerate its growth by leveraging the existing infrastructure of Avis. In addition, Avis expected to deliver around $50 - $70 million in annual synergies, including vehicle acquisition and financing costs, fleet utilization, and revenue increases. Indeed, the two businesses of car rental and car sharing are incremental and complementary to each other, as it both let people use the vehicles that members/customers don’t own. Avis would be for daily rental, Budget would for weekly rentals, and Zipcar would be for hourly rentals. It seems to be a great deal for Avis for leveraging Zipcar’s members’ base.

Huge Debt Burden

However, investors might get worried about Avis’ current huge debt burden. As of September, Avis booked only $791 million in total stockholders’ equity, $554 million in cash, but more than $10.7 billion in debt. The low equity was also due to the high treasury stock, which resulted from share buybacks, of more than $5.2 billion. Because of the high debt level, so even its market cap is only $2.31 billion, its enterprise value is $12.62 billion. The market is valuing the company at 11.36x EV/EBITDA, but only 0.3x sales, whereas $500 million deal has valued Zipcar at 1.85x sales. Hertz, at the trading price of $17.34 per share, is valued at 13.08x EV/EBITDA and 0.82x sales. 

Foolish Bottom Line

The acquisition of Zipcar is all about the potential synergies and operating leverage of the two businesses between Zipcar and Avis. Avis could leverage Zipcar’s huge membership base, more than 760,000 members, whereas Zipcar could leverage Avis’ vehicle infrastructure. I could potentially see a lot more to come after the acquisition for Avis’ business. However, with the huge net debt carried on the balance sheet, I would not comfortable initiating the position in Avis at the current moment.


hoangquocanh has no position in any stocks mentioned. The Motley Fool recommends Zipcar. The Motley Fool owns shares of Hertz Global Holdings, Inc. and 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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