How to Benefit From Hertz / Dollar-Thrifty Merger

Includes: CAR, DTG, HTZ
by: Cheep Talk

By Sandeep Balgia

Hertz (NYSE:HTZ) is making an offer for Dollar-Thrifty (NYSE:DTG). Consolidation of this sort helps all players in the industry by reducing capacity and allowing all firms, including those outside the merger, to raise prices.

There is an incentive then to stay outside the merger and gain from it. There has to be a countervailing force to overcome the positive externality of a merger.

In the rental car case, it seems Dollar has access to a leisure-traveller market that Hertz would like to get their hands on. And there is an interesting twist to the merger deal they signed with Dollar.

The Avis CEO would like to bid for Dollar (or so he says) and writes to Dollar:

[W]e are astonished that.. you have compounded these shortcomings by agreeing to aggressive lock-up provisions, such as unlimited recurring matching rights plus an unusually high break-up fee (more than 5.25% of the true transaction value, as described by your own financial advisor), as a deterrent to competing bids that could only serve to increase the value being offered to your shareholders.

Hertz has built in a nifty-seeming “match the competition” clause into its agreement with Dollar. If other bidders emerge, Hertz gets to match their bids and there is a break-up fee that deters Dollar from accepting another suitor.

There are several strategic effects. If Avis truly wants the Dollar leisure market access, this clause clearly makes it hard for them to acquire it. But it leaves Hertz vulnerable to a spoiling strategy by Avis (NASDAQ:CAR): Avis can start bidding up the price Hertz pays for Dollar by make high bids for Dollar. Avis won’t win Dollar but will leave Hertz stuck with a big payment.

Spoiling may backfire if it triggers a future price war, if Hertz is forced to take a short-run perspective and slash prices to survive. We will see what happens in the next few days.

Disclosure: No positions