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Updated to include additional analyst commentary and earnings estimates.
NEW YORK (
TheStreet) -- After stronger than expected fourth quarter earnings,
Hertz(HTZ - Get Report) may dust off its M&A playbook in 2012 and retry an acquisition of
Dollar Thrifty(DTG) to alleviate pricing pressures and wrench out cost savings, according to industry analysts.
Hertz may look at a merger with Dollar Thrifty as a way to stay aggressive in 2012 after its shares rose sharply on Tuesday on stronger than expected earnings and guidance. While analysts point to consolidation as a quick way for the second largest U.S. rental car company to continue to grow its profit margins, a deal still must overcome regulatory hurdles.
Hertz jumped the most in two months on Feb. 22 fourth quarter earnings
In October, Hertz pulled a cash and share exchange offer for Dollar Thrifty that valued the industry fourth player at $1.91 billion or $72 a share, on deteriorating market conditions, a negotiating deadlock and regulatory scrutiny. However, the company has kept hope of an eventual deal alive, with its Chief Executive indicating a continued 2012 push.
"[Our] Dollar Thrifty acquisition strategy remains the same, we continue to work forward constructively with the FCC on getting a consent decree and once we get that consent decree, our intension is to work with Dollar Thrifty's Board in order to try to consummate a transaction that makes sense to both companies," said Hertz Chief Executive Mark Frissora on a Feb. 23 earnings call.
"They are guiding to the next couple of months, absolutely," says William Kavaler a special situations analyst at brokerage Oscar Gruss & Sons about Hertz's potential to formally revive a Dollar Thrifty deal. Kavaler expects that Hertz will make a new offer for Dollar Thrifty in 2012, in a move that will add a budget brand to extend the lives of its luxury-tilted flagship vehicle fleet, improving profit margins. Kavaler holds an $80 a share takeover price target for Dollar Thrifty.
Such a would make sense as a quick way for the company to boost earnings, even if a merger isn't immediately needed for either Hertz or Dollar Thrifty, according to Fred Lowrance, an analyst with Avondale Partners. "[The] combination of a premium brand like Hertz and leisure brands like Dollar Thrifty makes a ton of sense," says Lowrance, who adds that such a tie up would be similar to
Avis Budget's(CAR - Get Report) $1 billion buy of
Budget in July 2011 and privately-held
Enterprise's 2007 acquisitions of
Alamo. Lowrance holds a "market neutral" rating on Hertz shares, with a $22 a share price target.
The key will be for Hertz to get approvals for a merger from the U.S.
Federal Trade Commission and then seek a buyer for its value-oriented
Advantage brand and some of its airport retail locations, minimizing antitrust concerns.
Penske, private-equity firm
Cerberus Capital Management and European rental car company
Sixt have all been reported as candidates for Advantage, says Lowrance. He adds that Avis is unlikely to return to the bidding table for Dollar Thrifty after abandoning a merger proposal in September, when a war emerged between it and Hertz.
"Avis has enough to chew on right now with integrating its Avis Europe acquisition, and plus, they already have a leisure brand (Budget)," says Lowrance.
After clearing the way for a deal, Hertz would also likely need to sweeten its previous offer of $56.70 a share in cash and an exchange of 0.8546 Hertz shares for each Dollar Thrifty share that equated to a $72 value, when announced. However, when Hertz shares slid last fall, the stock exchange became less economic. Meanwhile, Dollar Thrifty enacted a "poison pill" to prevent Hertz from accumulating a significant stake in the company.
If an offer were to re-emerge, it would likely have to be at a higher price to reflect increasing valuations and a friendly offer after Dollar Thrifty kept open its poison pill through May 2013. But, a deal would be a boost for Hertz because of the cash generating abilities of Dollar Thrifty, while it may also lead to industry wide pricing power.
A consolidation from four national car competitors to three with a merger would be a boost to rental car pricing for Hertz and the industry, which saw an increase in rental volumes outweigh pricing declines in the fourth quarter. "The final thing that investors are hoping for is that the industry can get pricing power... I think consolidation is the most likely way that they get there," says Lowrance.
Shares of Hertz are up nearly 24% year-to-date on improving sales, a decrease in expenses and a strengthening of the U.S. auto market. Meanwhile, Avis shares are up over 21% and Dollar Thrifty shares are up over 8% in 2012.
Analysts polled by
Bloomberg give Hertz shares a price target of $20.50, while they value Dollar Thrifty and Avis Budget shares at $79.40 and $20.69, respectively.
Those analysts also expect improving revenue and profits across the industry in 2012. Hertz's sales are expected to grow over 7% to $8.9 billion and its profitsare expected to more than double to $546 million. Meanwhile, Dollar Thrifty is expected to grow sales by nearly 4% and Avis Budget is likely to swing to a post-crisis high profit of $215.5 million, according to analyst estimates compiled by