Vanguard buy puts Enterprise in travel industry mainstream

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Enterprise Rent-A-Car's surprise acquisition of Vanguard, in a multibillion-dollar deal that apparently left competitor Dollar-Thrifty waiting at the altar, has all the earmarks of a metamorphic leap.

St. Louis-based Enterprise has focused on off-airport growth since its inception in 1947, finding its niche in local replacement rentals for insurance companies and repair shops. Until now, acquisitions have been hardly a blip on its radar, yet steady organic growth has made it the largest car rental operator in the country.

All that changed with the announcement of a buyout that brings two major airport location operators, Alamo and National, under Enterprise's growing umbrella. In one giant step, the deal will extend Enterprise's reach far into the leisure and corporate travel markets.

It is also likely to integrate Enterprise more tightly into the travel industry itself, observers said, bringing the company's relationship with other travel sectors -- hotels, airlines and cruise lines -- into sharper focus as it explores new marketing opportunities through its acquisitions.

  "This is something that is out of character for Enterprise," said Mike Kane, president of VRC Group, of Royal Oaks, Mich., an industry consultant. "The company has always grown organically, with no sizeable acquisitions, at least nothing like this."

But Kane and others describe the "pre-emptive strike" by Enterprise as a natural evolution at this point in its growth, which over 50 years will have taken the company from a local rental agency into a privately held, $7 billion-a-year juggernaut.

The merger agreement will boost Enterprise's total fleet from nearly 800,000 vehicles to more than 1.2 million and will increase its revenue by some $2.1 billion, the amount Vanguard of Vanguard's turnover last year, according to estimates.

The combined companies would have slightly more than a 46% share of the market. That might raise some eyebrows among federal antitrust regulators, who must determine whether allowing one company to control that big a chuck of the car rental sector would be anti-competitive.

But the acquisition is seen by most analysts as flying under the radar of federal antitrust officials. Kane, for example, said regulators "probably have bigger fish to fry," and Enterprise officials described a review under Hart-Scott-Rodino antitrust regulations as "routine."

The deal gives Enterprise a light-speed jump in its attempts during the past seven years to build its airport business.

Already a significant player globally, Enterprise will now be positioned to sell its services to corporate and leisure markets in a way that, prior to the acquisition of Alamo and National, had been a tough market.

Pat Farrell, vice president of corporate communications for Enterprise, said the opportunity to overhaul the company's airport business had been a key motivation to pursue the deal.

"We have worked strongly over the past seven years to begin to explore the airport market," he said. "It is not something we had a lot of background in, but ... we listen to where customers ask us to be.

"We have become large enough to know that the rental car providers who are going to be long-term players are going to be companies that provide customers and travel agents with their full complement of needs," he said. "Right now, we are a very small player at the airports. We have grown market share to 7%, and we are now at 230 airports, but it is very early on in this development."

In the past, Farrell said, while Enterprise would often emerge from sales calls to corporate accounts as a primary provider of rental services in a home city market, it was clearly second in airport business.

"Other players were used to dealing with the road warriors, and we were just not there," Farrell said.

Still, he said, the experience of making a foray into airport markets gave the company the confidence to go after the acquisition.

Enterprise made its move, Farrell said, after executives saw a report in the New York Times indicating that Vanguard and Dollar-Thrifty were in preliminary merger talks. The whole process took less than seven weeks after Enterprise went knocking on Vanguard's door.

Analysts early last week were still digesting the abandoned Vanguard/Dollar-Thrifty negotiations and mulling the impact of Enterprise combining its $7 billion annual revenue with Vanguard's $2.1 billion. Among investors, news of the merger sent Avis Budget Group's stock upward and pushed down Hertz's shares. 

Some observers, asserting that the industry was overdue for price increases, predicted that the active involvement of private equity players could kick off a round of hikes that would bring car rental rates more in line with actual costs.

Farrell declined to comment on that.

Even after the deal is completed, the competitive landscape will not be that much different for the other giants of the industry -- Hertz, Avis-Budget and Dollar-Thrifty -- except that the emergence of a new goliath will pit those public companies toe to toe against Alamo, National and Enterprise (assuming that Enterprise has no intention of subsuming the Alamo and National brands). 

Dollar-Thrifty, which has a market capitalization of $1.3 billion, was acquired by Chrysler in the 1990s and later spun off as a public company. In speculation in February regarding a Vanguard/Dollar-Thrifty merger, Vanguard was seen as the likely principal shareholder.

Interestingly, experts in the car rental market said, Vanguard's principal owner, Cerberus Capital Management, a New York-based investment firm that has its fingers in numerous industries, is one of several private equity groups bidding to take over Chrysler from Daimler-Chrysler.

Chrysler has long been a supplier of rental fleets to the industry. Cerberus has been building its presence in the automotive industry with the acquisition of a majority stake in GM Finance last year and by acquiring assets of auto parts suppliers in the past few months. Analysts said the moves indicated that Cerberus has been creating vertically integrated auto holdings that would fit together neatly in an acquisition of Chrysler.

One industry insider, who asked not to be named, said he expected Cerberus to make a play for Dollar-Thrifty as part of its acquisition strategy now that it has moved to divest itself of Vanguard.

Cerberus officials could not be reached for comment.

Enterprise's acquisition of Vanguard won't necessarily mean major changes in how the company buys and sells cars, a major factor in determining the profitability of rental car companies, but Kane predicted that its larger footprint would not hurt.

"It will increase their already big stature with the auto manufacturers," he said of Enterprise. "But they already do a fine job of buying and selling cars."

Cerberus created Vanguard in 2003 after its $230 million acquisition of bankrupt ANC Rental, which owned Alamo and National. Cerberus later took a dividend from Vanguard that was almost as large as the purchase price.

Enterprise has declined to say how much it paid Cerberus for Vanguard, but analysts have estimated that a combined Vanguard and Dollar-Thrifty would be valued at about $3 billion.

Major competitors don't seem worried. 

"Enterprise's acquisition of Vanguard should provide further stability in the market," said Hertz spokesman Richard Broom. "Generally, we think consolidation ... is a positive development."

Hertz, a subsidiary of the Ford Motor Co. until it was sold to a group of private investors, "is in a singularly unique position," Broom said. "We are the only single-brand company in the car rental business. We are able to focus on our cost structure and our strategies and not be distracted by dual -- or, in Enterprise's case, triple -- brand focus."

William Lobeck, president and CEO of Vanguard, predicted that the consolidation would benefit consumers.

Vanguard did not respond to a request for comment.

To contact reporter Dan Luzadder, send e-mail to [email protected].

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