Updated from 1:43 p.m. EDT
said Thursday that it was offering to acquire the 18.5% of car rental company
it does not already own for about $597 million.
Ford proposed to pay $30 a share for each outstanding share of Hertz, which is based in Park Ridge, N.J. This represents an approximately 24% premium over Wednesday's close of $24.25, well off its 52-week high of $51.75.
Shares of Hertz rose above $30 Wednesday, indicating that investors expected Ford to raise its bid. Hertz stock gained $7.38, or 30.4%, to close at $31.63. Ford's shares edged down 25 cents, or 1%, to end at $24.81.
Hertz's gain Thursday more than wiped out its decline in early September in reaction to an
announcement by the company that its third-quarter profits would fall short of forecasts. The company attributed the expected shortfall to competitive prices in the car rental industry and flight disruptions at
because of a
David Riedel, an analyst at
Salomon Smith Barney
, predicted the deal would get done, but not at $30 a share. Just prior to last month's earnings warning, Hertz shares were trading near $32, he said, adding that the company is fairly valued at close to $41 a share.
The company is currently trading at about seven times earnings, and that is after Thursday's surge in the stock price. Riedel argues that the entire rental car sector is undervalued. Indeed, the
trades at eight times earnings, while the
Dollar Thrifty Automotive Group
trades at 6.25 times earnings. This compares with a P/E ratio of 26.3 for the
stock index, a measure of the broad market.
Hertz's valuation has deteriorated since the company went public in 1997. In that year, it earned $1.80 per share, and traded at about 14.5 times earnings. In 2001, it is projected to earn almost twice that -- $3.45 a share is Riedel's estimate -- yet investors haven't rewarded the earnings growth.
"People question their ability to perform in an economic downturn," Riedel said, in an explanation for investors' skittishness towards car rental companies. This reasoning is flawed, he said, since car rental companies are able to reduce their fleets quickly in the face of economic uncertainty because of agreements with major manufacturers.
"Unlike hotels, car rental companies don't have a fixed capacity," he said. Riedel has a "one" rating for Hertz, Salomon's highest ranking. His firm was involved in Hertz' initial public offering in 1997, but has had no investment banking relationship since.
Ford's bid to reclaim Hertz is similar to recent
, the world's largest hotel franchiser, to buy up all the outstanding shares of Avis. In mid-August, Cendant
offered $29 a share -- or a 14% premium at the time of the announcement -- for the 82% of Avis it doesn't already own. In similar fashion to the Ford announcement, shares in Avis shot up over the bid price, and Cendant described its offer as "preliminary" and "nonbinding."
Shares of Avis remain above Cendant's offer, closing at $29.38, down 25 cents, or 0.8%, for the day.
Dearborn, Mich.-based Ford, which already owns 81.5% of Hertz, spun off a minority stake in the company in 1997, the same year Cendant spun off a portion of Avis.
Ford's proposal is subject to approval of the Hertz board.