Avis Budget Group (CAR) appears to be firing back after Hertz (HTZ) bested Avis in the three-year saga that had both Hertz and Avis in a bidding war to purchase Dollar Thrifty. Avis made the first move for Dollar Thrifty in 2010 and shortly after Hertz joined the battle. In 2011 Hertz withdrew its bid before finally coming back in 2012 to announce a definitive merger agreement to purchase Dollar Thrifty for $87.50 per share or around $2.3 billion.
As a strike back, Avis announced plans to acquire the car sharing company Zipcar (ZIP) for $12.50 or almost $500 million. The stock is trading at $12.20 -- $0.05 below the purchase offer. This is where some hedge funds with sizable portfolios might come in and purchase up shares of the stock in an effort to make 'easy' money on merger-arbitrage opportunities. But is that the case here? The break-up fee is $16.8 million, which pales in comparison to the jump in market value of over $200 million. A pull out by Avis would send the stock tumbling and the return is less than a percentage point, or could Hertz look to swoop in and steal the acquisition like it did with Dollar Thirty and drive the stock higher?
Zipcar investors are likely not looking for a repeat of the last acquisition battle Avis-Hertz partook involving Dollar Thrifty. Although investors were taken on a roller coaster ride of revised bids and withdrawals, the payoff was nice for those investors that rode it out. For those invested at the beginning of 2010 and holding out until the merger was complete late last year, they saw a return of over 220%.
It appeared that the Dollar Thrifty acquisition would give Hertz a distinguishable advantage in the car rental market, but this revenue model rehab that Zipcar will bring to Avis's income statement has caught our attention. It also appears that Avis might be getting the better deal. The savings for Hertz with the Dollar Thrifty synergies are estimated to be around $150 million, which could help boost operating margins by as much as 50%. But for 20% of the price, Avis expects to get 33% of the synergies that Hertz is expected to squeeze out of the Dollar Thrifty deal. Avis is paying $500 million for what should be $50 million -- on the low end -- in annual synergies, compared to Hertz's payout of $2.3 billion for $150 million in Dollar Thrifty synergies.
The acquisition will break Avis out of the conventional car-rental mold, one that Hertz jumped deeper into with the Dollar Thrifty acquisition. Granted Hertz does have an equipment rental business that's less than 20% of revenues, Avis also has a truck renting business. We believe that sharing is the future, especially for cars, where this business line will attract a younger demographic (18-25 years old) that are generally excluded from car rentals. The acquisition gives Avis a complete new revenue line and more exposure to international markets. Zipcar derived 17% of its revenues from Europe, while 33% of Avis' revenues were outside of North America for the first three quarters of 2012. This will give Avis an even greater leg-up on Hertz, who trails with only 25% of revenues from international markets.
The growth that Avis expects is undeniably robust, a long-term earnings growth of 25% annually, but Hertz comes in at 30%. Not to worry, Zipcar's 50% expected growth can easily give Avis the boost it needs. Avis has a market value ($2.1 billion) that is less than a third that of Hertz ($7.3 billion) but has the most room to grow. On a trailing price-to-earnings basis Avis trades at a 50% discount to Hertz and has a PEG of only 0.3.
Despite all this great news for Avis, it is also great news for Zipcar investors, who should be getting out of the stock. A 50% premium is a very fair offer, especially when considering that the Zipcar's stock has trended down over 50% since its April 2011 IPO. It is unlikely that Hertz will come in and make a play for the car sharing company, namely given the already rich valuation. The Hertz acquisition of Dollar Thrift was 1.5x sales, where Zipcar's comes in at 1.8x.