Bloomberg News

Dollar Thrifty Offers 24% Gain on Bet Hertz Seals Deal: Real M&A

October 03, 2011

Oct. 3 (Bloomberg) -- Dollar Thrifty Automotive Group Inc. is offering a 24 percent profit for traders who bet regulatory scrutiny and the worst credit markets in two years won’t scuttle its takeover by Hertz Global Holdings Inc.

Dollar Thrifty has fallen 33 percent from a record in June as Avis Budget Group Inc. withdrew a rival offer and Hertz’s need to divest a competing brand prolongs an antitrust review. The cash-and-stock bid was worth $65.21 a share as of Sept. 30, a 16 percent premium to Dollar Thrifty’s current price, the widest spread since Hertz submitted the bid in May, according to data compiled by Bloomberg. That’s the second-biggest gap of any pending U.S. deal over $1 billion, the data show.

Even after Avis’s retreat damped speculation of a bidding war, Hertz may still boost its offer to $70 a share to win over Dollar Thrifty’s board and shareholders with a 24 percent premium to the current stock price, said Oscar Gruss & Son Inc. While the economic recovery is deteriorating and companies’ borrowing costs have jumped to the highest level globally since 2009, Hertz needs the acquisition to secure its spot as the second-largest rental car agency.

“We’re pretty optimistic that they’ll reach a deal with Hertz,” Michael Shannon, co-manager of the $5 billion Merger Fund for Westchester Capital Management Inc. in Valhalla, New York, said in a telephone interview. “Some of these macro forces -- the credit markets, the economy maybe slowing down -- have had a negative effect on the spread. We’d like to think it’s a great arbitrage opportunity.”

The firm owned more than 2 million Dollar Thrifty shares, or 7.7 percent of the company, making it the second-largest holder as of June 30.

Rental Car Competition

Stephanie Pillersdorf, a spokeswoman for Tulsa, Oklahoma- based Dollar Thrifty, declined to comment. Richard Broome, a spokesman for Park Ridge, New Jersey-based Hertz, didn’t return an e-mail seeking comment.

Hertz is aiming to buy Dollar Thrifty to hang onto its position as the second-largest rental car provider in the U.S. behind Enterprise Holdings Inc. Hertz would gain a more profitable company than itself that caters to budget-conscious travelers.

The nation’s four biggest car-rental chains generate 83 percent of U.S. car-rental sales, according to a September report from IBISWorld, the Santa Monica, California-based industry researcher. Closely held Enterprise had a 40 percent share, followed by Hertz with 20 percent and Avis with 17 percent. Dollar Thrifty accounted for 5.7 percent of the industry’s sales, IBISWorld said.

Negotiating Power

Hertz could pay as much as $75 a share, representing a 33 percent premium to Dollar Thrifty’s closing price Sept. 30, given the cost and revenue benefits that would be generated in a takeover, Westchester Capital’s Shannon said.

Bill Kavaler, a New York-based special situations analyst for Oscar Gruss, said he estimates Hertz will increase its offer to $70 a share, a 24 percent premium.

“I remain convinced that if a deal gets done, it’s going to have to be done at a significant premium to the current price,” Kavaler said in a telephone interview. “They don’t need to sell, but Hertz has said they need to buy, so we know where the power in the transaction resides.”

Dollar Thrifty Chief Executive Officer Scott Thompson said in an e-mailed statement in June that the company’s “significant operating cash flow, cash-rich balance sheet, proven brands, combined with our synergistic and scarcity value is clearly more than $72 a share.”

Bidding War

Hertz and Avis have made at least six attempts to buy Dollar Thrifty in the past 18 months, according to data compiled by Bloomberg. In May, Hertz trumped a September 2010 bid from Avis by offering $57.60 in cash and 0.8546 in Hertz shares for each Dollar Thrifty share owned. That valued Dollar Thrifty at $72 a share on May 6.

Hertz’s stock has since fallen 47 percent through last week, lowering the value of the cash-and-stock bid by 9.4 percent to $65.21 a share. The offer was worth a total of $1.94 billion on Sept. 30, down from $2.14 billion when it was announced.

Dollar Thrifty shares reached a record $83.74 on June 3 as traders who profit from mergers and acquisitions bet that a bidding war between Hertz and Avis would lead to a higher takeover offer. Since then, Avis has dropped out and Dollar Thrifty has fallen 33 percent to $56.30. Hertz is trying to divest its Advantage brand to help facilitate approval to buy Dollar Thrifty from the U.S. Federal Trade Commission.

‘Biggest Hurdle’

“Trying to sell Advantage is probably the biggest hurdle,” Fred Lowrance, a Nashville, Tennessee-based analyst at Avondale Partners LLC, said in a phone interview. “This economic environment probably isn’t helping them find a buyer.”

Dollar Thrifty fell 3.8 percent to $54.17 today, while Hertz lost 8.9 percent to $8.11.

The Federal Reserve said last month that there are “significant downside risks” to America’s economy, while data from the Labor Department showed U.S. payrolls were unchanged in August, the weakest reading since September 2010.

The U.S. slowdown and Europe’s deepening sovereign debt crisis also caused investors to shun all but the safest corporate bond offerings worldwide last quarter.

The extra yield investors demand to own investment-grade corporate bonds globally instead of government debt grew to 264 basis points last month, the widest since July 2009, according to Bank of America Merrill Lynch index data. Yields for issuers rated below Baa3 by Moody’s Investors Service and less than BBB- by S&P rose to 9.94 percent, the most since December 2009.

Deal Spread

Dollar Thrifty shares were $8.91 below the bid before today for the second-widest spread on a percentage basis of any pending takeover in the U.S. greater than $1 billion, according to data compiled by Bloomberg. The biggest gap was Express Scripts Inc.’s takeover of Medco Health Solutions Inc. that represented a 25 percent premium as of Sept. 30.

“The spread is telling us, partly, nobody knows what the heck to do and partly that people are skeptical that the deal is actually going to get done,” said Kavaler of Oscar Gruss. “Dollar Thrifty represents one of the better risk-rewards. The dynamics of the U.S. domestic rental-car business are pretty stable and unlikely to really hurt Dollar Thrifty.”

Hertz was left as the lone suitor after Avis on Sept. 14 abandoned a $1.56 billion bid for Dollar Thrifty, citing “current market conditions.” In June Avis agreed to acquire Avis Europe Plc, the second-biggest car-rental company on the continent, with the backing of a $420 million term loan and $250 million in bonds. Avis said today that it completed the purchase of Avis Europe’s equity for $1 billion.

‘In the End’

Investors buying the bonds probably demanded Avis pay a higher coupon on the debt if it continued to pursue Dollar Thrifty, said Westchester Capital’s Shannon and Oscar Gruss’ Kavaler.

While Dollar Thrifty said final bids must be submitted by Oct. 10, Hertz isn’t likely to meet that deadline, which may extend the process through yearend, according to Shannon.

“If I was Hertz, I’d want to move a bit faster and not get caught up in a bidding war again because the Avis budget might be stronger next summer and will certainly be bigger,” Chris Agnew, a Stamford, Connecticut-based analyst at MKM Partners, said in a phone interview.

While Hertz may not be able to afford Dollar Thrifty’s June peak of almost $84 a share given Hertz’s stock decline and the weakening economy, the company can still offer a high enough price to close the deal, Shannon said.

“Hertz is very motivated to get this done now rather than later,” he said. “Hertz will get it in the end.”

--With assistance from Alan Goldstein and Pierre Paulden in New York. Editors: Sarah Rabil, Daniel Hauck.

To contact the reporters on this story: Tara Lachapelle in New York at tlachapelle@bloomberg.net; Devin Banerjee in New York at dbanerjee2@bloomberg.net; Mark Clothier in Southfield, Michigan, at mclothier@bloomberg.net.

To contact the editors responsible for this story: Daniel Hauck at dhauck1@bloomberg.net; Katherine Snyder at ksnyder@bloomberg.net; Jamie Butters at jbutters@bloomberg.net.


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