Hertz leveraged buyout process, bidding dynamics, and strategic alternatives

LBO

Hertz LBO Case

How does the dual-track process used by Ford to initiate consideration of strategic alternatives affect the bidding process for Hertz?

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 establish company with global operations. Furthermore, it has a stable revenue history that has had an extraordinary amount of consecutive growth. Plus Hertz has built a great deal of brand equity worldwide; especially in regards to the airport services they provide.

All of this makes works to make 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.

2) In what ways does Hertz conform or not conform to the definition of an Ideal LBO Target. Do you believe Hertz is an appropriate buyout target?

Hertz was a prime buyout target for a LBO because the company meets all of the classical criteria for the successful LBO target. It is a powerhouse of a brand name in 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 biding companies were predicting an IRR of over twenty percent. Such an IRR would easily double the market average and therefore Hertz represents a rather safe and profitable acquisition.

3) What value enhancing opportunities can the sponsors exploit in this transaction?

There was several possible value enhancing opportunities that were identified in this case. One such possibility deals with the equipment rental market. This subsidiary of Hertz primary operations has a lot of unique possibilities. For example, Hertz is mentioned to be the third largest player in the equipment rental business already. Therefore, it could use its brand power to continue to try to exploit this particular market segment. Thus the Hertz could focus on the airport RAC market for stability while continuing to develop market share in this segment. The nature of the equipment rental market is highly fragmented and as a result there may be opportunity to gobble up smaller competitors and dominate this market as well. However, on the other hand, the equipment rental business could also be spun off and sold to help finance the LBO if needed. Therefore there seems to be a lot of potential in the equipment sector that could be used for a variety of goals.

The case also mentions that Ford's management style in regards to Hertz was rather lax and hands-off. Therefore there seems to be other opportunities for value creation in the operations of the company. Compared with other firms in the same industry such as Avis, Hertz seems to have substantial opportunities to increase margins. It was stated that Hertz's expenses grew at a rate that greatly exceeded its revenue generation. Also, Hertz's assets lagged some of its major competitors which would indicate an insufficient use of capital. It seems evident that Ford's hands off approach to Hertz would offer new management several opportunities to create both efficiencies and higher margins.

4) What are the differences for Ford in selling to a private equity investor vs. conducting an IPO?

The primary difference in selling a subsidiary to a private equity firm as opposed to taking the company to the market through an IPO is that when selling to a private equity firm the seller will have more control and more security over the negotiations and the terms of the deal. Yet, at the same time, it is likely that both parties have some estimation of what the company would bring through the market offering that they would use as a baseline for part of their bargaining position. In this case both options were present which undoubtedly made for a complicated negotiating environment.