After evaluating Hertz, we recommend that Carlyle Group purchase Hertz for at least $2.3 billion. If they want to achieve a 20% return, they should offer $5.2 billion. A higher offer price is recommended due to the competitive nature of the dual-track process. The dual-track process has created a rather interesting environment for potential investors. Not only are investors competing with each other, but if the case that a deal is not worked out then Ford has made provisions for the company to be made public through an initial public offering (IPO). Hertz is a well established company with global operations. Furthermore, it has a stable revenue history that has had an extraordinary amount of consecutive growth. Additionally, Hertz has built a great deal of brand equity worldwide; especially in regards to the airport services they provide. All of this makes Hertz an ideal candidate for a leveraged buyout. The interesting aspect to this case is how the dual-track process was structured. Ford must have known that their subsidiary would have been a prime target for a leveraged buyout and gained enough confidence to put the pressure of the IPO option as an incentive for potential investors to move quickly. However, even if no investors emerged to acquire Hertz, it is also reasonable to suspect that Hertz would have fared well in the IPO. Yet, in the event that Hertz was sold through an IPO, there is a substantial amount of risk involved. Ford would have been subjected to whatever the market deemed the appropriate price for the stock was. Therefore, from their perspective, they had to juggle potential LBO offers with their prediction of what the company would have commanded in the marketplace. Hertz was a prime buyout target for a LBO because the company meets many of the classic criteria for a successful LBO target. It has an extremely strong brand name which consumer markets all over the world have come to know. It was actually listed among Business Week’s top 100 most valuable brands in 2005. Additionally it is one of the top three competitors in the rental car (RAC) market and commands a fair amount of market share. It dominates the airport rental segment and is estimated to hold roughly eighty percent of this market place. Hertz has relatively low existing debt obligations and has a long history of stable growth. This is one of the most important considerations for a successful LBO. It wouldn’t make sense for a company to accept large amounts of risk due to the lack of a stable financial history given the specific set of challenges that are present in a LBO purchase. If a company makes an acquisition through an LBO and the company isn’t successful then this makes for a horrific and complicated bankruptcy filing. However, given the financial stability that Hertz was described as having in the case it is reasonable to suspect that the company is a prime LBO target. In fact the bidding companies were predicting an IRR of 41.09% . Such an IRR would easily double the market average and therefore Hertz represents a rather safe and profitable acquisition. The bidding group was willing to pay $2.3 billion for Hertz. We used this offer price to calculate an IRR on the deal of 41.09% as seen in Exhibit 2. In calculating the terminal value, we used the exit multiple approach due to the fact that this deal is an 1
LBO. The sponsor of an LBO usually will sell the target in about five years, so it is more common to use the exit multiple approach than to use the perpetuity growth approach in calculating the terminal growth for an LBO. We found the terminal growth by taking an average of comparable Enterprise Value/EBITDA multiples for both the car rental business and the equipment rental business, then multiplied the Gross EBITDA in 2010 (the final year) for each by these average multiples to find a terminal value of each, and then combined the two to find a total terminal enterprise value of $27.35 billion. We then subtracted the...
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