Hertz - Acquisition Of Dollar Thrifty Creates Long-Term Value For This Levered Bet

| About: Hertz Global (HTZ)

Shares of Hertz Global Holdings (HTZ) ended Monday's trading session with gains of 8.1%. Hertz announced its intent to acquire Dollar Thrifty Automotive Group (DTG), in a deal valuing the company at $2.3 billion. Investors send shares in Dollar Thrifty 7.5% higher in the session.

The Deal

Hertz announced that it will acquire Dollar Thrifty Automotive Group in a transaction valuing the firm at $2.3 billion, or $87.50 per share, in an all cash transaction. The boards of directors of both companies have unanimously approved the transaction.

CEO and Chairman Mark Frissora commented on the deal, "We are pleased to have finally reached an agreement with Dollar Thrifty after a lengthy - but worthwhile - pursuit. We have always believed that a combination with Dollar Thrifty is the best strategic option for both companies. The transaction provides Hertz instant scale with two new, well-established brands with airport concession infrastructure in the mid-tier value segment."

For the first six months of its fiscal 2012, Dollar Thrifty reported revenues of $752 million. It net earned $90 million, or $3.03 per share. The company is on track to generate annual revenues of $1.5 billion, on which it could earn $180 million, or $6.00 per share.

The deal finalized three years of merger related speculation. Both executives agreed the deal is a win-win situation. Hertz will finance the deal with $1.45 billion in bonds, $500 million in loans and the remainder in cash.

Hertz sees annual cost synergies of $160 million per annum related to enhanced productivity, efficiency and general cost synergies. Furthermore, the combination has 10,000 locations over the world, which provides growth opportunities in mid-tier and premium markets.


Hertz reported its second quarter results on July the 30th. Hertz reported second quarter revenues of $2.23 billion. It net earned $93 million, or $0.21 per diluted share. The company operates with a net debt position of roughly $11.7 billion.

For the full year of 2012, Hertz expects revenues of $8.9-$9.0 billion. The company is expected to earn $570-$620 million, or $1.28-$1.38 per share.

Pro-forma, the company has combined sales of $10.5 billion, and is expected to earn $750-$800 million per year, excluding synergies. Hertz is currently valued at $6.0 billion. This values the firm at 0.6 times annual revenues and 8 times annual earnings.

Currently, Hertz does not pay a dividend.

Investment Thesis

Year to date, shares of Hertz have risen some 20%. Shares peaked at $16 in April and May, but fell to lows of $11 during the summer months. Shares recovered to $14 in today's trading session.

Over the past five years, shares have fallen roughly 35%. Revenues stagnated between 2008 and today, around $8.4 billion. The company lost $1.2 billion in 2008, and improved its profitability each sequential year. In the meantime, significant dilution took place. The number of shares outstanding rose from 323 million to 447 million.

Shareholders in Hertz are enthusiastic about the deal, which has long been rumored. Investors are pleased with the estimated annual synergies amount of $160 million. The deal will increase the $12 billion debt position to almost $14 billion. At the same time, net profits are increasing from $600 million per annum to $800 million for the combination. Factoring in after-tax synergies, net profits for the combination are expected to increase to $900 million.

Long term investors might find the deal rather attractive. Leverage ratios are significant, which might be dangerous in case of an economic slowdown. At the same time, the relative leverage ratio is not increasing as a result of the acquisition, while valuation levels are acceptable. Hertz is valued at 7 times annual earnings, factoring in estimated synergies and a successful integration.

Long term investors, who have confidence in the prospects of the economy, can make a levered bet on the future.

Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.