Hertz Revved Up for Dollar Thrifty on Advantage Bid

NEW YORK ( TheStreet) -- Hertz ( HTZ) may be set to clear one of the biggest hurdles to a possible acquisition of Dollar Thrifty ( DTG), solidifying its position as the nation's second leading car rental chain.

On Thursday, Hertz said that it received approval from the Federal Trade Commission to divest its Advantage brand. The move that may pave the way for an acquisition of Dollar Thrifty, a deal Hertz tried but failed to cut in 2011 and has said it would retry this year.
An Advantage sale signals a revival of Hertz's interest in Dollar Thrifty

"We have agreed on the material terms of a divestiture of our Advantage business with a potential buyer and have provided those terms to the FTC staff," said Hertz chief executive Mark Frissora on the company's Thursday earnings conference call, without disclosing the bidder. "We believe we have made substantial progress toward our goal to obtaining antitrust clearance that would allow us to consider the terms on which we might move forward with that acquisition" of Dollar Thrifty, he added.

Already, Hertz had been expected to dust off its M&A playbook in 2012 and retry an acquisition of Dollar Thrifty to alleviate pricing pressures and wrench out cost savings, according to industry analysts.

Hertz may look at a merger with Dollar Thrifty as a way to stay aggressive after a 2012 share gain stronger than expected earnings and guidance. While analysts point to consolidation as a quick way for the second largest U.S. rental car company to continue to grow its profit margins, a deal still must overcome regulatory hurdles.

In October, 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. However, the company has kept hope of an eventual deal alive, indicating a continued 2012 push.

" Our Dollar Thrifty acquisition strategy remains the same, we continue to work forward constructively with the FCC on getting a consent decree and once we get that consent decree, our intension is to work with Dollar Thrifty's Board in order to try to consummate a transaction that makes sense to both companies," said Hertz CEO Frissora in a Feb. 23 earnings call.

At that time, William Kavaler a special situations analyst with brokerage Oscar Gruss & Sons said he expected Hertz to make a new offer for Dollar Thrifty in 2012, in a move that could add a budget brand to extend the lives of its luxury-tilted flagship vehicle fleet, improving profit margins.

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 Lowrance an analyst with Avondale Partners in February.

A divestiture of Advantage and FTC approvals would be a key, citing Penske, private-equity firm Cerberus Capital Management and European rental car company Sixt as reported prospective acquirers of Advantage, added Lowrance. Avis, which abandoned a merger proposal with Dollar Thrifty in September amid a bidding war between it and Hertz, is unlikely to return to the table, he said.

If a merger were to happen Hertz would 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.

After divesting Advantage, Hertz would likely need to sweeten its previous cash and stock offer for each Dollar Thrifty share that equated to a $72 a share, when announced. When Hertz shares slid last fall, the stock exchange became less economic. Meanwhile, Dollar Thrifty enacted a "poison pill" to prevent Hertz from accumulating a significant stake in the company, which remains open through May 2013.

A higher price could also reflect a recovering economy and auto sector, punctuated by stronger than expected earnings by General Motors ( GM), on Thursday. A price could also turn what was a hostile bid into a friendly negotiation. After Dollar Thrifty shareholders rejected Hertz's initial takeover offer in late 2010, Hertz upped its offer in 2011. In October, Dollar Thrifty took itself selling block and launched a $400 million share buyback program.

Shares of Hertz are up over 34% year-to-date on improving sales and a decrease in expense. Meanwhile, Dollar Thrifty shares are up over 16% in 2012.

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Analysts polled by Bloomberg give Hertz shares a price target of $20.50, while they value Dollar Thrifty shares at $85.20.

Those analysts also expect improving revenue and profits across the industry in 2012. Hertz's sales are expected to grow over 7% to nearly $9 billion. Meanwhile, Dollar Thrifty is expected to grow sales by roughly 4%, according to Bloomberg data.

Even with strong growth in rentals and a still strong used car market, a key to companies as they sell old fleets, the big four in auto rental's struggled to increase prices in 2011. In first quarter earnings calls, Hertz, Avis Budget, and Dollar Thrifty all reported falling rental prices, with some expecting the trend to continue.

For more on M&A, see why some activist investors are putting their money behind corporate spending amid an investor focus on austerity,

-- Written by Antoine Gara in New York

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