This Stock Is a Million Dollar Baby!

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

2013 sure looks promising! The year began with the whole country celebrating the end of the 'fiscal cliff' scare. The first trading day of the new year witnessed soaring markets and rejoicing investors.

Zip it up!

Investors in Zipcar (UNKNOWN: ZIP.DL2), the world's largest car sharing network are especially cheerful. The company's price rose by $3.94 in Nasdaq pre-market on January 2. This price increase was the direct result of an announcement made by the company earlier that same day. According to the announcement, Avis Budget Group (NASDAQ: CAR) has offered to acquire Zipcar at a price of $12.25 per share, 49% higher than the stock's closing price on the last trading day of 2012.

With a total transaction value of approximately $500 million, the deal is expected to be complete by spring 2013. The deal was approved by Zipcar's shareholders, who hold approximately 32% of the company's common stock, as well as its Board of Directors.

Happier Times..

While the deal spells good news to Zipcar investors, it also means happier times for stake holders in Avis, which rose by 5.30% in the pre-market. The deal is expected to raise $50 to $70 million every year for Avis. Increased fleet utilization from the deal is expected to lead to cost reduction and increased earnings. In the long run, this deal could prove to be very beneficial for the stock.

Last year, the company had lost out to Hertz (NYSE: HTZ) in a race to buy out the car rental chain Dollar Thrifty. The acquisition of Zipcar will help Avis get back in the game with Hertz. As compared to the $1.5 billion Avis initially offered to buy Dollar Thrifty, Zipcar will be acquired for a much lower transaction value of $500 million. Avis plans to use corporate debt borrowings and cash to pay this amount.

Going Strong

What could this deal mean for Hertz, one may ask?

On the face of it, it may give it some worry.

Zipcar is the industry leader in car-sharing, a market that Hertz has been trying to capture for quite some time. In fact, in 2008, Hertz launched  Hertz On Demand, a program that provides hourly rentals to its global members, in a bid to compete with Zipcar. With nearly 160,000 members, Hertz is still far behind Zipcar, which has close to 760,000 members, known as Zipsters.

However, Hertz is currently ahead of Avis in the U.S. car rental sector and it may not have much to lose from Avis's move. Low rental rates, one-way rental facilities and a growing customer base may soon lead to a face-off between Hertz on Demand and Zipcar. Further, the company has a lot of resources and a large fleet of cars, especially after acquiring Dollar Thrifty. Hertz investors have nothing to worry in the long run.  

Bottomline

Zipcar should do well in the months to come. The deal with Avis will ensure that Zipcar will have a larger fleet to meet its high weekend demand. Further, after the stock's bad performance in 2012, this deal will make Zip's venture capitalists such as Benchmark Capital and Greylock Partners happy. Although the company does not offer one-way rentals presently, it may soon start doing so, given its competitors are doing it. This will mean even higher earnings. All in all, Zipcar investors have all the reason to celebrate this new year! 


sonamchamaria 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!

blog comments powered by Disqus

Compare Brokers

Fool Disclosure