Dollar Thrifty shareholders ride out the crisis on Hertz deal
For Dollar Thrifty shareholders, a recovery in the auto rental chain's 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 by Hertz's instance on a deal.
In the fall of 2008, Dollar Thrifty shares fell below $1, only to rebound with the rest of the U.S. auto industry. Bloomberg News reported recently that at the time Hertz offered to buy the company for $2 a share, a bid that was rejected even as the company's shares fell to a March 2009 low below $1.
What's notable about Dollar Thrifty's sale to Hertz are the terms, after a hard-fought, multi-year M&A battle. In October 2011, 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 scrutiny from antitrust regulators.Avis, which abandoned a merger proposal with Dollar Thrifty that September amid a bidding war between it and Hertz, confirmed it wasn't interested in Dollar Thrifty earlier in 2012. Dollar Thrifty shareholders rejected an initial $41 a share takeover offer from in late 2010, but the company returned to the deal table upping its offer in 2011 to $72 a share. However, after a fall in Hertz shares in the fall of 2011, the offer became less economic and in October, Dollar Thrifty took itself selling block and launched a $400 million share buyback program. Now, Hertz is paying up in cash at a 20% premium to its best previous offer, in a move that signals increased confidence in the prospects of the merger. A year's time helped Hertz prepare for what's likely to be a closely followed set of regulatory approvals by antitrust authorities, in a major consolidation effort. Meanwhile, by acquiring Dollar Thrifty, Hertz will reshape the auto rental landscape, in a move that could pay off in an improving economy. 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. 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. Hertz may look at Dollar Thrifty as a way to stay aggressive after already impressive 2012 share gains and stronger than expected earnings and guidance. It is paying Dollar Thrifty a record $87 price in the deal. The combination of a premium brand like Hertz and a leisure brand like Dollar Thrifty may be similar to a tie up's like the Avis (CAR) $1 billion buy of Budget in July 2011 and privately-held Enterprise's 2007 acquisitions of National and Alamo, said Fred Lawrence an analyst with Avondale Partners in February. Where are they now?: With the merger now poised to close after what may be a lengthy antitrust inquiry, investors may be wise to watch whether Hertz can improve rental car pricing, amid consolidation. Oftentimes a first mover like Hertz can change entire industry pricing dynamics. Meanwhile, the deal's merits will also hinge on macroeconomic factors like the price of oil, and consumer and business spending. -- Written by Antoine Gara in New York
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