Car Rental Companies Breaking Into Car-Sharing

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Earlier this month, Parsippany, New Jersey-based Avis Budget Group (NASDAQ: CAR) announced that it would purchase leading car-sharing service Zipcar (UNKNOWN: ZIP.DL2) in a deal valued at about $500 million. According to the terms of the all-cash formal offer, Avis will pay $12.25 per Zipcar share. Current Zipcar shareholders would not be eligible to receive shares of Avis or any purchase warrants. Although the deal faces several legal hurdles, it looks likely to clear by the end of the second quarter of 2013.

The deal provides Zipcar shareholders with a significant return on their investments. Relative to the stock's December 31, 2012 closing price of $8.24, the $12.25 cash-for-stock offer represents a 48.6 percent premium. Following the January 2 announcement, Zipcar's stock shot above $12 per share and has remained in a narrow range ever since. Although ZipCar has traded below $9 per share for most of the past six months, it has also traded above $11 per share as recently as July of 2012. The stock's poor performance during the second half of 2012 is attributable to a poor early-August earnings report.

Founded in 2000, Zipcar has expanded rapidly and remains at the forefront of the nascent car-sharing market. The company currently has about 11,000 cars available to nearly 800,000 members in 20 major U.S. cities. It also operates a significant student-focused car-sharing network centered around 300 of the country's largest colleges and universities. 

Zipcar performs especially well in dense core cities with relatively low levels of personal car ownership and among car-less college students and support staff. It leases "car time" by the hour to members who sign up for specific slots in advance. With its 2007 purchase of FlexCar, Zipcar has become the dominant North American car-sharing service.

Avis Budget Group is a leading North American rental-car company that has made several high-profile acquisitions in recent years. The company offers car and truck rental services in North America, Europe, Asia and other worldwide markets. With nearly 500,000 vehicles in its system, it remains a fearsome competitor in the crowded vehicle-rental space. In response to competition from smaller, more flexible rental outfits, Avis has begun padding its margins with a range of optional products, including GPS navigation devices and various forms of insurance protection. The company employs about 20,000 corporate full-time workers and thousands more part-time outlet staffers.

The proposed deal between Zipcar and Avis has ramifications that extend far beyond its two principals. Although the merger appears to be a coup for Avis, the company is actually playing catch-up. Major U.S.-based car rental companies like privately held Enterprise and New Jersey-based Hertz (NYSE: HTZ) have operated car-sharing services for years. 

Hertz's "Hertz On Demand" car-sharing service has expanded rapidly in recent years and now operates in several major North American and European cities as well as many larger American college towns. With a diverse offering of hybrids, plug-ins and all-electric cars from Mitsubishi, Toyota and Nissan, Hertz On Demand appeals directly to environmentally-conscious college students and city-dwellers. In turn, this has boosted Hertz's image within the rapidly-multiplying ranks of "green" consumers. 

In addition to giving it an immediate competitive advantage in the car-sharing space, Avis's Zipcar acquisition boosts the rental company's credibility among this affluent slice of the population. As automakers continue to beef up their "green" offerings, Zipcar's appeal may add a considerable amount of value to Avis's bottom line while neutralizing a potential threat from one of its principal competitors. Although the car-sharing market remains underdeveloped, credible estimates project that the industry's total revenue could exceed $4 billion by 2020. If high fuel prices continue to support growing population densities and lower core ownership rates within the redeveloped core cities of the United States's major metropolitan areas, the Zipcar acquisition could add billions of dollars to Avis's top-line annual revenues within the next decade.

However, this deal is far from assured. Soon after its announcement, activist shareholder Martin Bertisch filed a lawsuit alleging that Avis's offer undervalued ZipCar by a significant margin. The suit notes that Zipcar's stock has traded above $15 per share as recently as February of 2012 and hit $25 per share as recently as June of 2011. The suit also alleges that the deal's protection clauses place Zipcar at a competitive disadvantage in the event of the offer's withdrawal. 

If the suit is permitted to go forward, Avis may be forced to withdraw its offer or revise it upwards. Such a move would surely delay the deal's completion and could spark a bidding war between Avis's national rivals. Although Enterprise does not issue detailed public reports of its finances, the company is known to be in a strong financial position and may choose to step in with an offer of its own.

The pending merger between Avis Budget Group and Zipcar promises to unlock tremendous value in the leading North American car-sharing service and may provide a long-term boost to Avis's bottom line as well as its stock price. Assuming that the deal is not scuttled by a pending lawsuit or shareholder vote, it appears likely to clear by the summer of 2013. Despite its $500 million price tag, the deal could be a long-term boon for Avis. Prospective shareholders should take note.


mthiessen has no position in any stocks mentioned. The Motley Fool recommends Zipcar. The Motley Fool owns shares of Hertz Global Holdings 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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