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John W. Taylor
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John is a financial analyst in the software industry. He is formerly the President & Founder of Tiarta L.L.C. (www.tiarta.com), an independent, financial research firm that evaluates financial transparency and corporate communications in order to uncover indicators of operational, legal,... More
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  • Will Hertz survive the Dollar Thrifty acquisition? 0 comments
    Jul 12, 2010 2:52 PM | about stocks: HTZ, DTG

    In April of 2010, Hertz Global Holdings, Inc. (“Hertz”) announced that it signed a definitive agreement to acquire Dollar Thrifty Automotive Group, Inc. (“Dollar Thrifty”) in a cash and stock offering for approximately $1.3 billion.  The global recession has adversely affected Hertz’s financial results, but it has managed to survive.  Back in the fall of 2009, an accounting research firm identified Hertz on its list of 100 large companies likely to go bankrupt over the next 12 months.  Hertz’s financial situation has improved since the analysis was completed; however, it is not clear if Hertz has the short-term liquidity and cash flow to survive the acquisition and subsequent integration costs associated with the purchase of Dollar Thrifty.

     

    As of the end of March 2010, Hertz had $800 million in cash.  During Q1, 2010, it generated $300 million in cash flow from operations (“CFO”), but had an overall negative cash flow of $185 million.  Dollar Thrifty had $350 million in cash as of March 2010. During Q1, 2010, it produced CFO of $100 million, but it also had an overall negative cash flow of $50 million.  Hertz’s total cash outlay for the Dollar Thrifty acquisition is approximately $950 million.  Based on this obligation, Hertz will need to generate significant cash flow in order to pay for the acquisition and maintain its current operations.  According to company documents, the company is not issuing any debt to finance this acquisition. Cash flows during Q2 & Q3, 2010 will likely determine whether this acquisition is successful or result in a potential deathblow to Hertz. It is imperative that Hertz, and Dollar Thrifty, increase cash over the next two quarters (assuming the deal closes in Q4, 2010).

     

    Over the longer-term, it appears that the combined company will generate profits (based on Hertz’s projected $180 million of synergies) and may increase revenue at a better rate than the companies could have done individually.  However, Hertz must first get past the near-term cash disbursements surrounding the close of the acquisition. 

     

    If, for scenario one, we hold Hertz’s and Dollar Thrifty’s CFO from Q1, 2010 constant, they generate Q2 & Q3, 2010 total CFO of $600 million and $200 million, respectively.  If we assume cash flow from financing and investing are both $0 (neutral) then the combined company would have $1 billion in cash after the close (Hertz cash balance of $800 million + CFO of $600 million + Dollar Thrifty cash balance of $350 million + CFO of $200 million  - $950 million for acquisition = $1 billion), excluding any integration/restructuring charges.  Under this scenario, Hertz would be able to fund the acquisition without any liquidity issues. 

     

    If, for scenario two, we forecast, a less likely, but plausible scenario of flat cash flows for each company for Q2 & Q3, 2010, then the cash situation becomes much more dire.  Under this scenario, the combined company would only have $200 million of cash, post acquisition close.  If we factor in integration costs or a potential delay in collections, Hertz’s ability to close the acquisition would be significantly impaired.   

     

    Based on the likely outcomes, scenario one (positive cash flow over the next two quarters) is the more likely scenario.  The above analysis shows a viable merged company, but it also illustrates the tremendous risk, or lack of financial flexibility, that Hertz has with regard to completing the Dollar Thrifty acquisition.  Add into the mix, a recessionary environment and weak consumer demand, and it appears Hertz’s management went “all in” on this deal. 




    Disclosure: No positions in either Hertz or Dollar Thrifty.
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