VCPE: THE HERTZ CORPORATION (A)

Group 8
Abhishek Verma
Ashish Verma
Chaitra Chandrashekar

BACKGROUND
Ford, the holding company of Hertz Corporation, one of the worlds largest car
rental companies, is in pursuit of monetizing the latter by filing for an IPO of
Hertz shares and simultaneously pursue sale of the business. Eventually Ford
would execute the option that offers higher value. CD&R, one of the PE firms,
had approached Ford on several occasions to acquire Hertz because of its
industry leading position. Ford and Hertz management are skeptical of CD&Rs
intent and financial strength. The decision hangs on two outcomes:
1. Would a sale create more value than an IPO
2. Would CD&R beat the next bid from the Bain-Blackstone-Lee-TPG
consortium?

PROBLEM STATEMENT
CD&R and other PE groups have bid around $5.4 B. Ford have asked the PE
firms to revise their bid. CD&R has to decide whether $5.6 B is a fair price to
bid for The Hertz Corporation.

OBSERVATION
The car rental business is highly risky, asset intensive, seasonal and cyclical.
External factors like recession, heavy competition, disruptions like
September 11 terrorist attacks, makes this industry highly volatile. The
fluctuating sizes of companys rental fleets, combined with relatively high
fleet turnover, impose unusual demands on the companys capital structure
and financing arrangements. Hence these rental firms are often forced into
restructuring and ownership changes.
HERTZS OPERATIONAL IMPROVEMENT

U.S. RAC on airport operating expenses: CD&R estimated that labor per
transaction, administrative, and other costs had increased 41 %, 65 %
and 30 %.

VCPE: THE HERTZ CORPORATION (A)

Group 8
Abhishek Verma
Ashish Verma
Chaitra Chandrashekar

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 non-fleet 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.

PROPOSED CORPORATE STRUCTURE

I.

II.

FleetCo (includes Hertz Vehicle Financing and Hertz International)

Bankruptcy remote special purpose entities (SPEs) will provide

securitization for asset backed debt financing for Hertz car

Leasing payment from OpCo cover depreciation of the fleet and

finance ABS debt payments

OpCo (includes Domestic Subsidiaries and HERC)

OpCo will own rest of Hertzs assets excluding car fleet

It will conducts all rental transactions with customers

It will lease fleet from FleetCo and provide equity to FleetCo

GOALS OF NEW CAPITAL STRUCTURE

VCPE: THE HERTZ CORPORATION (A)

Group 8
Abhishek Verma
Ashish Verma
Chaitra Chandrashekar

1. Stability: Ability to survive severe business downturn without the need

to restructure or go bankrupt. Selling term loans ($1.85 billion) to
institutional investors with 7 years maturity and senior and
subordinated notes ($2.25 billion and $800 million) with 8-10 year
maturity will bring in much needed stability.
2. Flexibility: enable Company to manage large volumes of car purchases
and sales in tune with the market fluctuations. ABL revolver will
facilitate flexible borrowing based on future needs.
3. Liquidity: Enable Hertz to take advantage of opportunities for future
growth and expansion without refinancing. Extending financing fleet
debt through ABS will bring in more liquidity and stability as has been
seen historically.
4. Lower costs: Enable the company to obtain funds at lower costs than
under current capital structure. Revolving loan, loans with long term
maturity, a structure of asset-backed securities and asset-backed loans
will allow the company to obtain funds at lower costs.
VALUE DRIVERS

Lower costs due to improvements in operations will lead to higher

profits

Lower WACC due to high use of debt financing by ABS

RECOMMENDATION
In the light of above analysis, it make sense for CD&R should go ahead with the
deal with a valuation of $5.6 B.