Last week Avis Budget Group Inc. (CAR) announced it was acquiring Zip Car Inc (ZIP) - the world's leading car-sharing network - for $500 million or $12.25 per share. The assumption from Zip Car's customers was that given the headline valuation, the transaction was a monumental success for shareholders. But after a closer examination, though the acquisition price represents a 49% premium to Zip Car's stock price prior to the transaction's announcement, it is also an 18% discount to its IPO price of $18. In fact, over the previous 12 months the stock has never reached its IPO price, falling to as low of $6 per share in November 2012. According to Avis CEO Ron Nelson, the combined companies were expected to reduce costs by $50 million - $70 million annually from lower fleet costs to better fleet utilization.
Zip Car controls about 75% of the $400 million car-sharing industry in the United States. Moreover, according to Zip Car management, the car-sharing market in North America, Europe and Asia could reach $10 billion. Despite its market share dominance domestically, Zip Car has never turned a profit since its IPO, prompting critics to consider the company a failure financially. However, its earnings before interest, depreciation and amortization ("EBITDA") has been strong and growing. Through the trailing 12 months ended September 30 2012 ("TTM"), the company's EBITDA was $43.8 million, up from a loss of $191 million in 2009. Its EBITDA margin on a TTM basis was 16.2%, as compared to -0.1%, 4.0%, and 11.9% for years ended 2009, 2010, and 2011, respectively. The expected operating synergies with Avis should increase its EBITDA margin immediately.
Overall, I like the acquisition. The purchase price is 11.4x Zip Car's TTM EBITDA, while its EBITDA is expected to grow organically and via cost synergies. The acquisition gives Avis a leading presence in the niche hourly rental market; just as importantly, Zip Car offers Avis a hedge against a double-dip recession and the possibility that traditional car renters will turn to the cheaper hourly rental market if the economy turns down again. According to SHOCK EXCHANGE How Inner-City Kids From Brooklyn Predicted the Great Recession and the Pain Ahead, a double-dip recession is all but a certainty as big ticket items that drive the economy - housing starts and auto sales - have been anemic despite the Fed's quantitative easing program.
The Fed initiated its Quantitative Easing program in the fourth quarter of 2008. Yet housing starts have been flat since that period; starts were 906 thousand in 2008 and ranged from 554 thousand to 609 thousand from 2009 to 2011. Auto sales were 13.5 million in 2008, reached a trough of 10.6 million in 2009 and rebounded to 13 million in 2011. But they still pale in comparison to the roughly 17 million just prior to the financial crisis.
I am bearish on the U.S. economy and the market as a whole. However, I think Avis' acquisition of Zip Car is an excellent strategic play that makes sense financially and helps to protect Avis' income in case of another economic downturn.