1. CD&R pursued Hertz for three years only to find itself facing an auction and a complicated deal. Is it worth it?
• It is worth it. Because hertz is a mature company with predictable cash flows. Such acquisition provides a great opportunity to generate decent return on equity to sponsors
• CD&R had access to available debt avenues to make the company grow
• CD&R was able to make operating changes and improve the companies efficiency
2. What are the primary sources of value in the transaction – both operating changes and financing changes?
• U.S. RAC on airport operating expenses - CD&R estimated that labor per transaction, administrative, and other costs had increased 41 %, 65 % and 30 %.
• U.S. RAC off-airport strategy - CD&R proposed to slow expansion, focus selectively on profitable growth, and close locations that failed to achieve positive contribution.
• European operating SG&A expenses - Hertz’ operational SG&A expenses as a percentage of revenue were nearly three times higher than those in the U.S.
• U.S. RAC fleet costs - Despite its scale advantages, Hertz historically had higher fleet costs than those of key competitors.
• U.S. RAC nonfleet capital expenditures - Reduce future capital spending to a level more in line with competitors
• HERC, Return On Invested Capital (ROIC) - HERC managers earned maximum bonuses year after year, despite the low returns on capital. CD&R expected to realize significant savings by changing managers’ incentives to focus on ROIC.
3. Couldn’t Ford afford to make these changes itself? Why or why not?
• Ford was in financial trouble at the time and finally considered selling Hertz inorder to improve its balance sheet.
• Ford executives had several years in the car rental business and were convinced that they were running a finely tuned company.
• Management was receiving high-end bonuses for less than stellar company performance, and didn’t not have the correct incentives in place for management to turn the company around.
4. Why separate Fleetco and Opco?
• This structure allowed CD&R to maximize the debt capacity of the fleet with ABS funding.
• OpCp would have a capital structure more typical of an LBO (sponsors equity and bank debt), where as Fleetco would be financed by equity from OpCo with as much external ABS as could be obtained.
5. How much value do you expect to be created by the operating improvements and capital structure changes envisioned by CD&R?
U.S. RAC on-airport operating expenses
• CD&R can reduce expenses by 5% over five years.
• $75 million per year saved
U.S. RAC off-airport strategy
• Potential saving of $100 million. Projected at $58 million.
European operating and SG&A
• Consolidation of back offices, $100M saving per year. Projected at $33M
U.S. RAC nonfleet capital expenditures.
• If reduced to industry average, this would save $90 million per year. Projected at $57 million.
• Change management incentives to focus on ROIC. $159 million saving over 5 years.
6. How would you explain the proposed transaction structure developed by CD&R and its partners? Specifically, how does it help or hinder the realization of anticipated sources of value in the deal?
• $5,3 billion ABS debt in US, 3-7 years
• $2,0 billion hybrid ABS/ABL structure internationally, 3-7 years
• Seek additional $1,7 billion committed but unfunded ABS capacity in US & Europe, to fund expansion and cyclical swings.
• $1,5 billion of equity from Hertz
• $200 million 5 year letter of credit
• ABS and insurance agreement require FleetCo to hold $100 million in cash
• Equity was owned by OpCo
• $1,4 billion ABL revolver sized...