Hertz, Avis Back On Private Rd. - 2001-01-29

<B>Hertz, Avis Back On Private Rd.</B>

By Lynn Woods

In the latest round of ownership shifts in the car rental industry, Ford Motor Co. is buying up the 18.5 percent of Hertz Corp. stock it doesn't own and Cendant Corp. is repurchasing 74.4 percent of outstanding shares of Avis Group Holdings Inc. it sold when Avis went public in 1997. Both acquisitions are testaments to the strengths of Hertz and Avis as well-run, profitable companies, despite the relatively lackluster performance of their stock prices.

"From an equity point, we've long thought that the car rental firms are undervalued," said David Riedel, vice president of equity reserves at Salomon Smith Barney. "The parent companies share our view. These are very profitable companies and good brands."

Ford has agreed to acquire all the publicly held shares of Hertz stock at a price of $35.50 per share, an increase of 18 percent over the company's original offer of $30 per share last September. The $710 million deal is due to be completed by the second quarter.

Cendant has agreed to acquire the 25.6 million outstanding shares of Avis Group common stock for $33 per share, an equity value of about $935 million. "We look forward to the combination with Avis Group to enhance both our offline and online travel strategies," said Cendant chair, president and CEO Henry R. Silverman.

Meanwhile, Avis Group chair and CEO A. Barry Rand, who became head of Avis after it acquired PHH Arval and Wright Express a year and a half ago, is leaving his position once the deal with Cendant has been completed. Rand will continue to serve Cendant as a special advisor to Silverman and the board. An Avis spokesperson said it was too soon to say how he would be replaced.

F. Robert Salerno will continue as president of Avis Rent A Car, which is part of Avis Group Holdings. Avis Group's two other top execs, Kevin Sheehan, president of corporate and business affairs and CFO, and Mark Miller, president and COO of vehicle management services group, will become Cendant CFO, and president and COO of Cendant's travel division, respectively.

For corporate buyers, the repercussions could include more opportunities to benefit from synergies with their sister firms, particularly in the case of Cendant, which has evolved into a multi-faceted travel company with a host of hotel brands, real estate brokerage offices and various outsourcing services, including employee relocation and customer loyalty programs. "Avis fits in well with Cendant's wide range of hospitality services," said Riedel. "Expect to see more ties with its other companies."

Avis already has established an admirable track record for leveraging car rental with related automotive services. At the end of 1999, it purchased from Cendant the huge fleet leasing company PHH Arval and Wright Express, the world's largest fuel card provider. Cendant's predecessor, prior to its merger with CTC to form Cendant, HFS, had spun off Avis as a publicly traded company in the fall of 1997 after purchasing the car rental firm in 1996. Upon its purchase of PHH and Wright Express, Avis' stock price fell dramatically as analysts speculated that the acquisition actually was motivated by Cendant's desire to get some fast cash as a way of unloading its burden of debt. The cynics were wrong, and Avis made hay of its new possession. It sold off PHH's Europe business for much more than it had paid for the division and built its business by offering fleet management to corporate customers.

The consolidation of the fleet programs and vehicle distribution for Avis and PHH resulted in further efficiencies, said Neil Abrams, president of Abrams Consulting International in Purchase, N.Y. Based on this success, "you'll see more leveraging of PHH and an intertwining with Cendant's other brands," Salomon Smith Barney's Riedel said.

Meanwhile, Cendant, which spun off Avis and other companies it had acquired in order to focus on its core business, has been evolving into a travel services company with a variety of synergistic interests. As a strong travel brand offered at a good price, Avis fits right into that business model, said Abrams.

For Hertz, "down the road there may be more tie-ins to Ford Motor Co. from the rental side of things," said Ford spokesman Todd Nissen, although he didn't provide any specifics. Ford's ownership of Hertz fits in with its goal of transmuting from a one-note automobile manufacturing company to an automotive products and services corporation. Repurchasing Hertz also will save on costs related to being a public company, such as fees for shareholder meetings and SEC filings, Nissen added.

The prospect of Ford owning Hertz lock, stock and barrel may recall the bad old days of the early 1990s, when the car rental companies were owned by the automotive manufacturers, which used them as dumping grounds for their unsold inventory before selling them off as unprofitable albatrosses. But this deal is of an entirely different ilk.

"The industry has matured to the point where the manufacturers wouldn't go down that road of extreme unprofitability," said Riedel--nor go back to a model in which the strongest players, such as Hertz, struggled with razor-thin profit margins. Ford's ownership should have no impact on Hertz' operations or fleet program. Even if Ford wanted to offer Hertz favorable terms on cars, it can't, due to contractual obligations with Budget Group and other companies to which it supplies cars to not favor one car rental firm over another, said Riedel.

That's not to say the move doesn't represent, in part, a kind of insurance policy for Ford as the economy slows down and the automotive retail market falls off. "Hertz is valued for its position in the global market," said Abrams. "Ford sees a good opportunity to buy back and leverage one of the largest fleet markets in the world. Now that there's a softening of the economy, another reason to acquire a fleet operator is that you've got huge volumes of vehicles you can move."

More fundamentally, perhaps, Riedel noted that Ford's 81.5 percent ownership stake in Hertz had been a source of frustration to Hertz management because it severely limited the amount of stock that could be publicly traded. "Ford had two choices: to spin off more of Hertz or purchase the company," Riedel said. "Institutional investors appreciated the size of Hertz and were concerned about the limited liquidity. Ford had to do something."

So, will the new ownership of the industry's two biggest players have any impact on prices? Probably not, especially given the fact that number-three player National Car Rental returns to its solid business travel niche after suffering from a bit of an identity crisis over the past two years. No one says the pressure's off regarding the industry's continual efforts to raise rates--a major issue with Wall Street, which linked what were perceived as lagging rates to the poor performance of the car rental companies' stock prices.

That wasn't the only concern, said Riedel. "When investors became concerned about the strong economy not continuing forever, the only benchmark in the car rental industry was the 1991 and 1992 recession, when the industry performed terribly," he said.

As inside investors know, the problem stemmed from overfleeting, rooted in the car rental firms' ownership by the automobile manufacturers. But things have changed.