Hertz, Dollar Thrifty Upgrade Deal on Economy

NEW YORK (TheStreet) -- Investors looking for a gauge of the economy headed into Labor Day weekend need look no further than Hertz's (HTZ) multi-year takeover battle for Dollar Thrifty (DTG), which culminated on Sunday when its $87.50 a share cash bid worth $2.3 billion for the discount rental car giant was accepted.

What a difference a year makes.

Last year Dollar Thrifty bidders like Hertz were bracing to pull out of takeover efforts on the heels of a worsening debt spiral in Europe and a confidence-draining downgrade to the U.S.'s debt ratings in Aug 2011. Now, Hertz is opening up its purse strings, in a cash deal that exceeds its previous $72 a share cash and stock offer by over 20%.

For Dollar Thrifty shareholders, a recovery in earnings and buoyed expectations of travel spending appear to be all the difference. Those who stuck with the rental firm as it teetered on bankruptcy have also been amply rewarded. At the market bottom in March of 2009, Dollar Thrifty shares fell below $1, only to rebound with the rest of the U.S. auto industry.

Meanwhile, a year's time has also helped Hertz prepare for what's likely to be a closely followed set of regulatory approvals by antitrust authorities, in a major consolidation effort.

Fundamentally, a multi-year fall in Dollar Thrifty's earnings stabilized in second quarter results, and this year shares drove toward five year highs above $80 in the absence of a M&A. Nevertheless, Hertz's consolidation efforts come in a car rental market that's still facing price pressure, signaling that it perceives the growth opportunities and cost synergies of a deal to add value as the market improves.

Even with industry-wide growth in car rentals and a strong used car resale market - a key to companies as they sell old fleets -- the big four in auto rental chains struggled to increase prices in 2011. In first quarter earnings, Hertz, Avis Budget, and Dollar Thrifty all reported falling rental prices.

Hertz has been steadfast on the strategic merits of a deal, culminating in Sunday's offer, in a merger that signals confidence in an industry that rises and falls on cyclical trends like leisure spending and business travel.

"We'll be a stronger global competitive player with a full range of rental options not only in the U.S. but in Europe and other markets given Dollar Thrifty's strong international presence," said Hertz's chairman and chief executive, Mark P. Frissora, said in a Sunday press release.

"We are pleased to have finally reached an agreement with Dollar Thrifty after a lengthy -- but worthwhile -- pursuit," added Frissora, highlighting still pending regulatory approvals.

As part of the merger, which comes at a near 8% premium to Dollar Thrifty's Friday close, Hertz will sell its Advantage discount car rental unit to franshiser Franchise Services of North Americaand infrastructure investor Macquarie Capital.

In a May earnings call, Hertz said it had located Advantage buyers and received Federal Trade Commission approval for a sale, in a move that signaled it was gearing up for a Dollar Thrifty bid later in the year.

By acquiring Dollar Thrifty, Hertz will reshape the auto rental landscape, in a move that could pay off in an improving economy.

With Dollar Thrifty, Hertz will bolster its competition with privately-held industry leader Enterprise. According to a 2012 survey by research firm IBISWorld, the four largest car rental companies in the U.S. control roughly 80.5% of the market, with Enterprise holding the largest 38% market share, Hertz second at 18.9%, Avis at 18.5% and Dollar Thrifty a long fourth at 5% of the overall market.

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