Hertz Case

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BIDDING FOR HERTZ

November 19, 2012

EXECUTIVE SUMMARY In April 2005, Ford announced its intention to investigate possible strategic alternatives for Hertz. At the same time, Ford’s stock price went down significantly. This negative reaction from the market shows Ford’s lack of confidence in its future operation, since Hertz is one of the strongest subsidiaries and revenue sources for Ford. Even though Ford would lose significant value of itself in this transaction, the slump in Ford’s main business especially in North American segment and a possible downgrade of its bond rating forced them to conduct drastic financing strategy to recover itself. The company had two alternatives to rid of Hertz: selling to a private bidding group via LBO transaction and listing on public stock exchange market. Their priority was to acquire the immediate cash through this transaction of Hertz. Our analysis of the LBO offer proposed by Bidding Group yields an expected return of 21.2%, and expected return by the public market to equal 24%. FORD’S MOTIVATION In 2005, Ford is valuing possibilities of selling its 100% subsidiary of Hertz in the most financially favorable manner. During Jacques Nasser’s presidency, Ford lost its financial stamina. Nasser successfully finalized many deals including Volvo, Land Rover and Hertz, yet this aggressive business expansion and buyout gave Ford a very vulnerable position. As the Ford’s need for cash increase, it began considering the strategic alternatives of selling Hertz privately to private investors and going to a public offering. This dual truck process can increase the bargaining power for Ford in the bidding for Hertz. FORD’S DUAL-TRACK PROCESS (1) During Jacques Nasser’s presidency, Ford’s cash reserve was quite low and they were looking to unload Hertz in the most financially feasible way. By putting Hertz on the market to privately held bidding groups like Carlyle’s and not just releasing an IPO, Ford created a more flexible and competitive future for Hertz, and increased the bidding price. First, private bidders realize that if Ford is unsatisfied with the offers for Hertz, they will be very likely to list it as a publicly traded security, which will offer them an immediate inflow of cash. Knowing this, each bidder must be aware of what the differences in valuation and incentives for the involved parties will be if Hertz remains private or goes public. Second, this may also have the affect of Hertz receiving premium bids if those bidding see additional value and synergy in the acquisition. Further, the bidders run the risk of having to pay a significant premium if they still wish to acquire Hertz after an IPO. Based on the logistics of game theory, the bidders who see additional value in Hertz will not risk offering a low price. Instead, to beat out competitors, they will offer their highest price feasible to ensure competitors cannot free-ride on each other’s efforts in valuation. Therein, the dual track process creates a more competitive environment in the bidding for Hertz, which should only help Ford obtain a higher sale price of Hertz. HERTZ BUSINESS ENVIRONMENT

Rental Car Market Revenues of the US rental car market in 2004 were about $17.4 billion. It is a 5.5% improvement from the previous year. In the US the top three players, Enterprise, Hertz, and Avis, capture more than 60% of market share in the rental car market. This oligopoly market structure can be a barrier for new market entry and gives stable cash flow to the companies. The revenue determiners for the rental car business are: number of transaction, length of each rental, price per rental day, and fleet utilization. Since Hertz is the leading player in the airport segment, volume of air travel is a crucial revenue factor. Additionally, travel volume is expected to increase by 6.9% from 2005. The 9/11-related downturn in enplanement seemed to rebound back, although, off-airport rentals are expected to grow faster...
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