Ford Will Buy Budget, Bucking Industry Trend

<FONT SIZE="+3"><B>Ford Will Buy Budget, Bucking Industry Trend</B>

By Lynn Woods

Dearborn, Mich. - In an action that defies the trend among U.S. auto manufacturers, who have chosen to rid themselves of their car rental companies, Ford Motor Co. is acquiring all of the common stock of Budget Rent A Car, giving it direct ownership.

Neither Ford nor Budget would comment on the terms of the deal, which is setto be finalized by the end of the year and is subject to approval from federal antitrust regulators. Ford purchased the non-voting preferred stock of Beech Holdings Corp., Budget's parent company, in 1989; Budget and Beech Holding Corp. have since merged.

Since acquiring Beech Holdings Corp., Ford has pumped millions of dollars into Lisle, Ill.-based Budget, which has consistently lost money. In the second quarter of 1996, Ford recorded an after-tax loss of $437 million on unsecured loans to Budget, along with its investment in Budget's non-voting preferred shares. However, the loss is offset by an after-tax gain of $650 million from its initial public offering of 19.3 percent of The Associates First Capital Corp., the finance company it owns, in May. That profit resulted in a one-time after-tax net gain of $213 million for the quarter.

Christian Vinyard, a Ford spokesman, said the manufacturer was supportive of Budget's new management and the steps it had taken to turn the corner. "We think they'll be profitable this year," he said.

Last year, turnaround expert Jack Frazee was hired as chairman of Budget. The firm consolidated some of its operations and laid off 20 percent of its salaried employees.

Another factor in Ford's decision was its success with Hertz, which it acquired in 1994. Hertz has had "record profits" in the past three years, Vinyard said. In the first six months of 1996, Hertz's profits were up $30 million over the amount for the same period last year, he said.

In contrast to Ford's vote of confidence in the profitability of its car rental companies, General Motors sold National Car Rental last year to a group of investors and is currently in the process of selling its 29 percent share in Avis to HFS Inc., the hotel and car rental franchise company (<I>BTN</I>, July 29). Chrysler also has put its two car rental divisions, Thrifty Car Rental and Dollar Rent A Car, up for sale. Vinyard said Hertz and Budget would remain entirely separate, although some back-office operations might be consolidated and best practices shared.

William Reiter, CEO of Reiter Associates Consulting, a Miami-based car rental consulting firm, said Budget might benefit by adapting Hertz's software for its management information systems. "One of Budget's problems is it didn't have a sophisticated information management and yield management planning system," he said. Getting technologically up to speed could be a major factor in helping Budget take market share away from Alamo and Dollar, he added.

Ford gains by getting tighter control of its fleet distribution and remarketing of vehicles, said Neil Abrams, president of Neil Abrams Associates, a car rental consulting firm in Purchase, N.Y.

Being owned by a manufacturer, as opposed to simply having an agreement with a supplier, also enables Budget to be more nimble in its fleet management. "They have the potential to turn the spigot on and off whenever they want," said Reiter.

Hertz and Budget together account for 27 percent of the car rental industry, according to <I>Auto Rental News</I>, a trade magazine in Redondo Beach, Calif. Vinyard said because Budget mainly focuses on leisure rentals and Hertz on business, there would be no overlap. However, about half of Budget's business is in the corporate arena.

But Abrams said there was no conflict of interest. "Ford has controlled Budget for a number of years, so that synergy has always existed," he said. The manufacturer began selling and financing its vehicles to Budget more than 25 years ago.

If there's one segment that loses, it's independent car rental firms, said Reiter. Coupled with HFS' purchase of Avis, the Ford acquisition "is tougher on independents. The big companies are buying up everything.