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Hertz Gets Stuck in Neutral

The car rental's IPO fails to impress Wall Street.

Shares of rental car behemoth


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were driving on a flat tire after the company's IPO.

Hertz, which priced its initial public offering at $15 a share late Wednesday -- below projections -- was up just 2 cents, to $15.02, on its first day of trading. After shares rose 31 cents, to $15.31, in the first half hour of trading Thursday, the air quickly hissed out of the stock.

Hertz's IPO raised $1.32 billion, which is less than the private equity firms that own the company had been expecting.

The underwriter team leading the offering,

Merrill Lynch



Goldman Sachs

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JPMorgan Chase

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, had hoped to price shares between $16 and $18. But in recent days the IPO -- one of the biggest this year -- met with stiff resistance from institutional investors.

The New Jersey-based rental company, which is selling 88 million shares, had hoped to raise up to $1.58 billion.

But market sources say investors were balking at paying a higher price for Hertz shares because they felt the company was valued too high and that the private-equity consortium that bought Hertz from


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a little over a year ago had not done enough to turn the rental company around.

One trader says he reduced his allocation of shares because he anticipates the stock trading lower in the aftermarket. He expects to pick up more shares after the offering.

Some on Wall Street also objected to the fact that none of the proceeds from the offering would go to the nation's biggest rental car company. Rather, the proceeds would used to pay a special dividend to the private equity firms and pay down a $1 billion loan that financed an earlier special dividend for the deals backers.

Private-equity firms usually make money by buying a company and cutting costs or reforming the business over a number of years. Depending on the investment, the private equity firm often will pay itself a dividend each year for its work, then sell the restructured business for more than the purchase price.

But the private equity group that bought Hertz couldn't wait to cash in. The group includes the private equity arm of Merrill Lynch, the Carlyle Group and Clayton Dubilier. The three firms sank just $2.3 billion of their money into the $15 billion buyout last year.