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Prices May Zip Higher After Zipcar, Avis Deal

NEW YORK ( TheStreet) -- Whether it's Avis Budget (CAR - Get Report) buying up struggling upstart Zipcar (ZIP), Hertz (HTZ - Get Report) acquiring Dollar Thrifty (DTG) or (PCLN - Get Report) taking over Kayak Software (KYAK), travelers should expect these deals to push up prices in the fast consolidating travel sector next holiday season.

Travel industry giants like Hertz, Priceline and Avis have used a depressed post-crisis economy to make the case for consolidation - taking out price-competitive discount competition. As the U.S. economy builds momentum, it won't be a surprise to see travel, plane and car rental deals evaporate as prices rise.

In the past 24 months, Hertz has been able to cut what's likely the last mega rental-car merger to cap a consolidation of the industry to three giant players, meanwhile online travel search specialists Kayak Software and ITA Software have fallen into to larger players like Priceline and Google (GOOG - Get Report).

While price increases are never outlined in the announcement of a deal, analysts covering rental car stocks like Hertz and Avis have long pointed to M&A as a way for the industry to drive flat pricing growth and revenue. In travel search, the merger of two industry heavyweights might have a similar impact.

The airline sector is also in the process of what could be a necessary consolidation to drive prices higher in an improving economy. In 2010, United (UAL - Get Report) was able to buy Continental Airlines -- forming the largest U.S. airline. After American Airlines 2011 bankruptcy, signs indicate U.S. Airways (LCC) is slowly building the consensus needed to swoop in and buy its struggling, discount competitor from bankruptcy.

Still, in the wake of Avis's announced Wednesday acquisition of Zipcar for about $500 million -- or $12.25 a share -- antitrust officials are unlikely to take notice of how consolidation in the travel sector - be it land, air or web - impacts prices in a recovering economy.

Avis and Zipcar aren't direct competitors as the car rental giant may have been for Dollar Thrifty, a competitor it failed to acquire in a multi-year takeover dance that raised Department of Justice and Federal Trade Commission fire.

In acquiring Zipcar, Avis highlights significant operating and fleet synergies between the two companies, in a merger of complementary industry players. According to Avis, Zipcar will also remain an independent subsidiary of the company.

"We see car sharing as highly complementary to traditional car rental, with rapid growth potential and representing a scalable opportunity for us as a combined company," Ronald L. Nelson, Avis's chief executive, said in a statement.

With Avis's broad reach, an acquisition of Zipcar could be exactly what the hourly car rental specialist for urban centers needs to become solidly profitable.

Avis said in a statement, it could use its existing fleet to help serve Zipcar's loyal subscribers in peak demand such as weekends and that the deal will drive up to $70 million in overall yearly cost savings. As of the third quarter, Zipcar had roughly 760,000 subscribers - known as Zipsters, in some circles.

Meanwhile, after losing the Dollar Thrifty sweepstakes to Hertz, Avis may be taking a jab at its rising competitor. While Zipcar accounts for the majority of what Avis projects is a $400 million a year 'on-demand' rental car market, Hertz On Demand may fill out a significant chunk of the remainder, which caters to high density urban areas where daily car rental costs are often impractical.

If Wednesday's deal with Avis raises anxiety for deal hungry travelers, it may be more of a relief for Zipcar's venture capital investors like Benchmark Capital, Greylock Partners and Revolution, who saw the value of their shares fall by more than half since the company's IPO in April 2011 at $18 a share. Avis said shareholders representing approximately 32% of the Zipcar's outstanding common stock support the deal.

In 2012, Zipcar shares fell roughly 50% to $8.24. That means in spite of a similar sized premium to Wednesday's merger, Zipcar opens trading in the New Year far below where it was last time the ball dropped in Times Square.
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