Rental Car Companies: There's Fewer Than You Think
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When you walk into a typical airport it appears there are tons of rental car companies all competing with each other for the same customers. Sometimes ten or more counters will all be lined up leading some people to wonder why these companies don't consolidate to cut down on costs and competition. But the number of rental car counters is deceptive. In reality there are much fewer rental car companies than there are counters.
The most well known brand names have consolidated through a series of mergers, acquisitions, and buyouts to create a far smaller group of major rental car companies. However these rental companies have kept their individual brand names alive. Here we will explore which brands are owned by which major rental companies.
The Hertz Alliance
Among the largest in car rental companies in the United States is Hertz Global Holdings (NYSE: HTZ) and the other renters it controls. After a bitter fight between Hertz and rival Avis Budget Group (NASDAQ: CAR), Hertz succeeded in taking control of Dollar Thrifty Automotive Group and completed the share transaction in late 2012. Now valued at $7.1 billion, Hertz is worth over three times the value of Avis Budget.
Despite its massive size, Hertz does not currently pay a dividend and may instead be focusing on its debt load which leads to a debt to equity ratio of 5.0. While not catastrophic, this debt load does need to be carefully monitored. At this point, Hertz appears to have decided reinvesting in itself and funding acquisitions should go ahead of shareholder dividends.
Actively Growing Rival
Having lost the battle for Dollar Thrifty Automotive to Hertz, Avis appears ready to pick up a new type of rental car company. Quickly growing Zipcar (NASDAQ: ZIP) received a takeover bid from Avis Budget with a premium of nearly 50 percent. With this move, Avis hopes to expand by attracting a group of younger renters and taking control of a faster growing startup.
The Zipcar deal comes as $500 million, all cash. With a debt to equity ratio of 13.7, Avis Budget may need to watch this increase net debt. But for this company, keeping up with competitors is important and Zipcar could help Avis Budget compete with Hertz On Demand. Additionally, Avis Budget sees less demand from their corporate clients when demand for Zipcars is highest. If cars can be shared between the two companies, resources could be more effectively used resulting in higher earnings and better returns.
The Rental Car Company You Can't Own
While it is not publicly traded, it is important to mention the presence of Enterprise Holdings in any analysis of the rental car industry. As one of the largest privately held companies in the world, Enterprise Holdings controls not only Enterprise Rent a Car, but also National Car Rental and Alamo Car Rental. The latter two companies were acquired by Enterprise Holdings after its acquisition of Vanguard Automotive Group.
Enterprise Holdings forms a direct competitor to publicly traded Hertz and Avis Budget. Their counters and locations are often in competition with each other and the actions of one in terms of pricing, acquisitions, or strategy can have a dramatic effect on the others.
Consolidation's the Game
Unlike many airline mergers, the names of acquired rental car companies have been kept alive after their mergers. Today's customer has the choice of a wide variety of brands with different brands targeting different types of customers. But underneath the skin, these brands have been consolidated into larger car rental companies which can employ greater economies of scale and cut down the number of rivals. With this wave of consolidation and a possible pick up in corporate travel over the next few years, rental car companies could make for an interesting play for a rebounding economy.
TulipSpeculator1 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!