Seeking Alpha
Long/short equity, special situations, value
Profile| Send Message| ()  

Shares of Zipcar Inc (ZIP) rose 47.8% in Wednesday's trading session. Avis Budget Group (CAR) made a $12.25 offer per share in cash for the car sharing network company. Shareholders of Avis Budget react favorably to the proposed deal, sending shares of Avis 4.8% higher.

The Deal

Avis Budget Group announced that it has agreed to acquire Zipcar in a deal valuing the firm at approximately $500 million, or $12.25 per share. Shareholders in Zipcar stand to receive another 0.6% if the proposed deal takes place at the proposed price.

Zipcar is a leading business in the car sharing industry, which has grown to a $400 million business in the U.S. Zipcar currently has over 760,000 members in major metropolitan areas.

CEO and Chairman Ronald L Nelson commented on the deal, "By combining with Zipcar, we will significantly increase our growth potential, both in the United States and internationally, and will position our Company to better serve a greater variety of consumer and commercial transportation needs. We see car sharing as highly complementary to traditional car rental, with rapid growth potential and representing a scalable opportunity for us as a combined company."

For the full year of 2011, Zipcar generated annual revenues of $241.6 million on which it lost $7.1 million. The $500 million deal, values Zipcar at roughly 2.1 times annual revenues.

By combining with Zipcar, Avis expects to generate annual synergies of $50 to $70 million, which is very sizable. The company expects to find cost reductions from fleet life cycle management and great financing availability. Furthermore, an increase in fleet utilization will be significant given Zipcar's current peak demand in the weekends.

Avis expects that the deal is accretive to the company's earnings per share in the second year following the acquisition.

The deal is subject to shareholder approval, but already some 32% of Zipcar's shareholders have approval for the deal. Furthermore the boards of both companies have unanimously approved the deal which is expected to close in the spring of this year.

Valuation

Avis ended its third quarter with $554 million in cash and equivalents. The company operates with a very sizable debt position of $10.8 billion in both short and long term debt, for a net debt position of roughly $10.3 billion.

For the first nine months of the year, Avis generated revenues of $5.66 billion. The company net earned $336 million during the period. At the presentation of the acquisition of Zipcar, Avis guided for annual revenues of $7.3 billion on which it could earn $2.35-$2.45 per diluted share.

The market currently values Avis at $2.2 billion. The current valuation values the firm at 0.3 times annual revenues and 9 times annual earnings.

Avis does not pay a dividend at the moment.

Some Historical Perspective

For the full year of 2012, shares of Avis have almost doubled. Shares started the year around $11 per share and rallied after the company issued an upbeat outlook for the year. Shares rose eventually to $21 per share in December, currently trading at those levels.

Investment Thesis

Shareholders of Avis applaud the deal with Zipcar. Both companies operate in a related business and Avis is attracted to the strong growth profile of Zipcar. The company's operations are highly complementary resulting in very high synergy estimates of $50-$70 million per year.

As such the expected synergies alone could justify the $500 million price tag of Zipcar. The deal multiples will furthermore come down to 1.8 times annual revenues based on Zipcar's full year revenue outlook of $277 million. This is still far above the valuation of Avis at 0.3 times annual revenues.

Avis is on track to generate annual revenues of $7.6 billion on a pro-forma basis. The company could earn roughly $300 million on a pro-forma basis, assuming a rapid integration for the business.

In November of last year I took a look at Zipcar's prospects. At the time I concluded that the recent share decline might have been overdone given the strong growth of the firm and solid profitability of key "mature" markets. I argued that investors might see an interesting exit-opportunity in case a competitor is willing to pay a significant control premium, which happened on Wednesday.

I think Avis makes an excellent buy by acquiring Zipcar, but I refrain from investing in Avis given the significant net debt position of the firm. I feel sorry for shareholders of the first hour in Zipcar which bought into the company at $18 per share in the public offering. Shareholders will lose a third of their investment, despite an almost 50% premium.

Furthermore, I would have been optimistic about Zipcar's long term prospects on a stand alone basis, given the continued trends towards car sharing in large metropolitan areas and the company's dominant market position. Unfortunately shareholders will never find out.

Source: Avis Makes An Excellent Acquisition By Acquiring Zipcar