Hertz owners want more, more, more

Posted by: Aaron Pressman on October 27, 2006

It looks like the three leveraged buy-out firms that own Hertz are trying to make some kind of statement about just how much can be sucked out of a recent acquisition before it’s flipped. The kind of statement that’s in the neighborhood of about $1.4 billion. As bounty hunter Jack Walsh aka Robert DeNiro said in Midnight Run: that’s a very respectable neighborhood.

Recall that proceeds of the original $1 billion IPO, filed in July, were going to be used to repay debt that funded a $999 million special dividend in June to LBO owners Clayton, Dubilier & Rice, Inc., The Carlyle Group and Merrill Lynch Global Private Equity. This week, the firms filed a revised prospectus upping the shares to be sold in the initial offering and boosting the deal value to $1.8 billion. Where's the extra dough going this time? Mostly to pay a new special dividend of $426.8 million or more (depending on the IPO share price). After that choice pay out, the sponsors will have recouped more than half of the $2.3 billion they put up to take Hertz off Ford's hands at the end of 2005.

The company's underlying performance away from the ever-expending debt load still looks pretty good. Revenue for the first nine months of 2006 topped $6 billion, up 8% from the same period last year. Earnings before interest, taxes, depreciation and amortization hit $2.3 billion, a gain of 9%. Net income plunged to $76 million from $325 million largely due to an almost doubling of interest costs. The number of car rental transactions was about unchanged while the average revenue per rental rose 3%. How overall revenue jumped that much despite seemingly tepid transaction and average revenue increases isn't crystal clear. Something in the car division's results called "non-rental rate revenue" and reported as a negative number dropped and non-car equipment rentals appear to have grown strongly but that's a fraction of the overall business.

With 320.6 million shares outstanding after the IPO, if Hertz prices at the mid-point of its filed $16 to $18 a share range, the company will have an equity market cap of almost $5.5 billion plus some $13-ish billion in total debt (debt stood at $13.96 billion on Sept. 30 but will be reduced with proceeds of the IPO) and cash of $441 million. That's an enterprise value of about $18 billion. There's a bit too much restating of everything in prior periods to get a sold handle on trailing 12-month results but the EV is less than 2-1/2 times 2005 revenue.

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Reader Comments

CrossProfit

October 29, 2006 04:24 AM

With 14 billion in debt and nearly double the value of Ford’s selling price, there are too many questions and not enough information to justify investing in this IPO. Based on the latest information (which will probably change) a forward PE of 30+ is way too high.

Disclosure: This comment was written by a CrossProfit analyst and does reflect the official opinion of CrossProfit.com.
http://www.crossprofit.com

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