Hertz + Dollar Thrifty = Corporate + Leisure
After stronger than expected fourth quarter earnings, Hertz may dust off its M&A playbook in 2012 and retry an acquisition of Dollar Thrifty to alleviate pricing pressures and wrench out cost savings, according to industry analysts.
Hertz may look at a merger with Dollar Thrifty as a way to stay aggressive in 2012 after its shares rose sharply on Tuesday on stronger than expected earnings and guidance. While analysts point to consolidation as a quick way for the second largest U.S. rental car company to continue to grow its profit margins, a deal still must overcome regulatory hurdles.
“[Our] Dollar Thrifty acquisition strategy remains the same, we continue to work forward constructively with the FCC on getting a consent decree and once we get that consent decree, our intension is to work with Dollar Thrifty’s Board in order to try to consummate a transaction that makes sense to both companies,” said Hertz Chief Executive Mark Frissora on a Feb. 23 earnings call. In October, Hertz pulled a cash and share exchange offer for Dollar Thrifty that valued the industry fourth player at $1.91 billion or $72 a share, on deteriorating market conditions, a negotiating deadlock and regulatory scrutiny. However, the company has kept hope of an eventual deal alive, with its Chief Executive indicating a continued 2012 push.
Such a move would make sense as a quick way for the company to boost earnings, even if a merger isn’t immediately needed for either Hertz or Dollar Thrifty, according to Fred Lowrance, an analyst with Avondale Partners. “[The] combination of a premium brand like Hertz and leisure brands like Dollar Thrifty makes a ton of sense,” says Lowrance, who adds that such a tie up would be similar to Avis Budget’s $1 billion buy of Budget in July 2011 and privately-held Enterprise’s 2007 acquisitions of National and Alamo. Lowrance holds a “market neutral” rating on Hertz shares, with a $22 a share price target.
A consolidation from four national car competitors to three with a merger would be a boost to rental car pricing for Hertz and the industry, which saw an increase in rental volumes outweigh pricing declines in the fourth quarter. “The final thing that investors are hoping for is that the industry can get pricing power… I think consolidation is the most likely way that they get there,” says Lowrance.
Shares of Hertz are up nearly 24% year-to-date on improving sales, a decrease in expenses and a strengthening of the U.S. auto market. Meanwhile, Avis shares are up over 21% and Dollar Thrifty shares are up over 8% in 2012.