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.
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…
