Ending a courtship that lasted two years, Dollar Thrifty Automotive Group last week agreed to be acquired by Hertz Global Holdings in a $2.6 billion transaction that will put more than three-quarters of the U.S. car rental market under the control of two companies, Hertz and Enterprise.
Hertz agreed to pay $87.50 a share in cash for Dollar Thrifty, more than double its original offer in April 2010. The process was drawn out when a bidding war for Dollar Thrifty erupted with Avis Budget and by challenges Hertz encountered in addressing antitrust issues with the Federal Trade Commission (FTC).
To win antitrust approval, Hertz said it had agreed to divest some of Dollar Thrifty’s airport concessions and sell the U.S. operations of its Advantage Rent-A-Car value rental subsidiary, for an undisclosed price, to Franchise Services of North America (FSNA) and Macquarie Capital. FSNA owns the U-Save and Rent-a-Wreck car rental companies.
With the Dollar Thrifty acquisition, Hertz, which is currently in nearly a dead heat for U.S. car rental market share with Avis Budget, will jump firmly into the No. 2 position behind closely held Enterprise Holdings, which controls half the U.S. market. Post-acquisition, Hertz would control about 26% of all U.S. rentals, while Avis Budget would have about an 18% share, according to car rental trade publication Auto Rental News.
More importantly, Hertz, which has long specialized in corporate and high-end leisure rentals, gains entree into the mid-tier and value segments that the company has long sought, most recently with the 2009 acquisition of Advantage.
During an Aug. 27 conference call with analysts, Hertz CEO Mark Frissora pointed specifically to Hertz’s opportunity to expand the Thrifty brand overseas.
“It was very important for Hertz to get a strong foothold on the value segment,” said former Hertz executive Neil Abrams, now a principal at Abrams Consulting Group in Purchase, N.Y. “They have for decades been trying to figure out how to capture that business.”
If completed, the acquisition would put an exclamation point on an era of consolidation in the $22 billion U.S. car rental market. It started in 1997 with the combination of Alamo and National, two brands that were acquired by Enterprise in 2007.
In between those deals, Avis and Budget came together in 2002 when Avis’ then-parent, Cendant Corp., acquired Budget.
During that period, Hertz itself went from being a wholly owned subsidiary of Ford to a stand-alone, publicly traded company, after a restructuring by a private equity group in 2005-06.
“This is a transformative deal that will allow Hertz to benefit significantly from the growth prospects and operational efficiencies of a much larger business and a best-in-class operation,” Frissora said. He estimated that the combined company would be able to pare at least $160 million a year from the two companies’ separate operating costs.
“It’s been a long road to get to this point, and it hasn’t been an easy one,” he said.
The transaction, which is expected to close by year-end, is contingent upon approval by Dollar Thrifty’s stockholders and the FTC.
If completed as planned, the acquisition would also mark a validation of the turnaround efforts of Dollar Thrifty CEO Scott Thompson, who took over the company in October 2008, five months before the company’s stock hit a low of 62 cents a share.
Under Thompson, Dollar Thrifty slashed costs and closed unprofitable locations while benefitting from an improving used-car market that enabled the company to fetch better prices when it resold its cars.
Between 2008 and 2011, Dollar Thrifty’s annual earnings rose to a net income of $159.5 million, from a net loss of $346.7 million, even though annual revenue fell to $1.55 billion from $1.7 billion.
“Hertz will be able to swell the company’s product offerings and expand geographical operations in ways that would be difficult for Dollar Thrifty to do as a stand-alone company,” Thompson stated on the Aug. 27 conference call.
Hertz first reached an agreement to buy Dollar Thrifty in April 2010 for $41 a share, but that July, Avis Budget set off a bidding war with its own bid of $46.50 in cash and stock. By that September, Hertz had raised its offer to $50.25. When Dollar Thrifty failed to get the requisite shareholder approval to ratify an acquisition, Avis Budget raised its bid to about $52.70 a share.
By May 2011, Hertz had increased its offer to $72 a share, forcing Avis Budget to announce the following month that it was bowing out, instead agreeing to buy Avis Europe for about $1 billion.
Hertz then withdrew its bid last October after Dollar Thrifty said it was finished soliciting acquisition proposals, would buy back some of its shares and would continue as a stand-alone company. That same month, Avis Budget completed its Avis Europe acquisition.
Whether the buyout and further consolidation means higher prices for consumers remains unclear. Hertz estimates that with the acquisition, its U.S. airport market share would jump to 37% from 26%.
National Consumers League Executive Director Sally Greenberg observed that in any retail industry, continued consolidation usually results in “more ability to set higher prices and less robust market forces keeping both prices and services in check for consumers.”
Car rental earnings have recently been buoyed by a combination of larger transaction volume and lower depreciation costs from a strong used-car market, while pricing has actually fallen slightly, indicating little risk of rate hikes as a result of the transaction, Abrams said.
He added that Enterprise and Avis Budget remain substantial enough to offer alternatives should Hertz boost pricing at Dollar or Thrifty.
“The competitive field will keep Hertz honest in how they look to position Dollar Thrifty on a pricing standpoint,” Abrams said. “Changing pricing strategy could backfire, and [Hertz] could lose the value proposition of this deal. Throughout all that consolidation, the market pricing has remained about the same. Things shouldn’t change.” Follow Danny King on Twitter @dktravelweekly.