On Wednesday, Avis (CAR) announced that it was dropping its bid for rival Dollar Thrity Group (DTG), leaving Hertz (HTZ) as the likely lone suitor left in this saga. This has been a close to 18 month battle, over which time Dollar Thrifty's stock has doubled. But that's just peanuts compared to the bigger picture.
Let's go back to March of 2009. On March 3rd, DTG hit an intraday low of $0.60. Yes, that's right. 60 cents! It doubled that month and was at $5 by May. Wish you had bought it then? Yeah, me too. The stock continued its rise, and by the end of 2009, it was almost back to $30 per share. Quite a move, huh? It would continue. The stock traded in the mid $30s before Hertz came in with its initial $41 offer. That was the next leg up. It traded in the high $40s until earlier this year when it started to rise again on speculation that a bidding war will take place.
And it did for a while. The stock rose from $55 in March to nearly $85 in early June. The stock settled back into the mid $70s. Like the rest of the market, it got hit in August, falling to a low of $58. But it has rebounded nicely since then, and now settles in around $65. Yes, that's 65 dollars, not cents. If you had invested $10,000 at that low in March of 2009, you'd have more than a million dollars now. You'd be quite happy, so too would the IRS.
But now it seems the road is coming to an end. Avis has been struggling to complete a deal to buy out Avis Europe, so financing two deals at once just wasn't going to work. Wednesday's news leaves Hertz to close the deal, and many believe it will.
But how much will DTG fetch now? Its shares are up 10,700% in the past 2.5 years. While Hertz is expecting revenue growth of about 8% this year and next, Dollar Thrifty is expecting flat growth this year and only 3% next year. Despite EPS growth this year on reduced costs, analysts were not expecting any growth next year (although they may not be estimating it because of a possible deal). The main reason is market share.
According to IBISWorld, a California based researcher, Hertz has about a 20% market share in the US car rental business. Enterprise is at 40%, and Avis was at 17%. Dollar Thrifty accounted for a little under 6%. So you can see why Hertz and Avis have been battling for this company. Hertz will now be a clear 2nd in the industry, and it prevents Avis from taking over the #2 spot. Interesting enough, Dollar Thrifty is worth 40% more than Avis in market cap, but has less than 1/3 of the revenues.
In the end, I think a deal gets done, and that's a big win for Hertz. But the question is at what price. Given the big run up so far, I don't expect a 30% or 40% premium. I wouldn't be surprised if $70 to $75 gets it done, although I would expect DTG shareholders to want a little more than that.
Remember, though, Hertz needs to be sensible here. It can't overpay if it is the only bidder. I don't see Avis coming back, even if Hertz doesn't reach a deal. But if Hertz walks away, I think you see some of those huge gains going away. Investors have been betting on this deal for the past 18 months and $30 of stock price, and now looks like the time to finally end this long drive.