Professional Documents
Culture Documents
Richard Hunt '14 (RHunt14@gsb.columbia.edu) Stephen Lieu '14 (SLieu14@gsb.columbia.edu) Rahul Raymoulik '14 (RRaymoulik14@gsb.columbia.edu)
Current Capitalization Stock Price Diluted Shares Outstanding (M) Market Cap Corporate Debt Cash
Unfunded Pension Liability
Enterprise Value
Hertz has strong revenue growth opportunities in the U.S. and will realize significant revenue and cost synergies through its acquisition of Dollar Thrifty
Divestiture of non-core Equipment Rental business would unlock substantial value by deleveraging the balance sheet
Trading Statistics 52-Week Range $10.22-$24.28 Dividend Yield 0.0% Avg. Daily Volume (M) 7.7 Short Interest as % of Float 11.0% Summary Valuation 2013e EV / Revenue 1.5x EV / EBITDA 7.4x P/E 12.5x
Business Overview
Business Description
Car Rental (2012 rev: $7.6bn): Operates through the Hertz, Dollar and Thrifty brands. Rents cars that the company owns or leases. Maintains a substantial network of car rental locations both in the United States and internationally, and the largest number of airport car rental locations in the world Equipment Rental (2012 rev: $1.4bn): Operates through HERC brand. Rents a broad range of industrial, construction and material handling equipment. Also sells new equipment and consumables. One of the largest equipment rental companies in North America
Rental Locations
With the acquisition of Dollar Thrifty, the Company has over 10,000 locations across the United States and 17 other countries
U.S. 3,210 642 2,568 1,360 4,570 Intl 1,215 304 911 150 1,365 Total 4,425 946 3,479 1,510 5,935 4,335 10,270
Staffed rental locations Airport Off-airport Non-staffed locations Total Corporate Franchised / Licensee Total Locations
Revenue Breakdown
Equip ment Rental 15%
Segment
Geography
Intl 30%
International Countries Puerto Rico France U.S. Virgin Islands Germany Canada Italy Brazil Luxembourg Belgium Netherlands Czech Republic Spain
90%
80% 70% 60% 50% 40% 30%
20%
10% 0%
1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012
$45
Jan Feb Mar Apr May Jun Jul Aug Sept Oct Nov Dec
$35
$25
We made a strategic decision to minimize our participation with less profitable commercial accounts. Hertz CEO in February 2013
+10%
-3%
Jan-11
Feb-11
Mar-11
Apr-11
May-11
Jun-11
Jul-11
Aug-11
Sep-11
Oct-11
Nov-11
Dec-11
Jan-12
Feb-12
Mar-12
Apr-12
May-12
Jul-12
Aug-12
Sep-12
Jun-12
Fleet, 40%
IT, 31%
We've always maintained the position that if there was a reason to divest it that was shareholder friendly, we're not resistant to looking at other things and other variables in terms of the equipment rental business. Hertz CEO in February 2013
$2.35
Valuation Analysis
Methodology
Hertz currently trades at 7.4x forward EV/EBITDA versus its pre-crisis average of 8.5x On a forward P/E basis, Hertz currently trades at 12.5x This is a significant discount relative to its historical average forward P/E of 14.0x and pre-crisis average of 15.4x Based on an average of P/E, EV/EBITDA and SOTP analysis, we arrive at a target share price of $36 or +52% upside to today's share price Divestiture of HERC would lead to incremental 20% upside
($ millions except per share) FY2014 Estimates Car Rental EBITDA Equipment Rental EBITDA Consolidated EBITDA EPS Target Forward Multiples P/E EV/EBITDA SOTP: Car Rental SOTP: Equipment Rental Price per Share P/E x EPS EV/EBITDA x EBITDA SOTP Target Price Upside (Downside) Key Assumptions RPD CAGR (FY'12-'14) Manheim Index CAGR (FY'12-'14) Chg. in Residual Value due to Channel Mix Shift Cost Synergies (FY2014)
Target Price
Base $2,413 509 $2,922 $2.87 12.5x 7.4x 7.4x 6.2x $35.93 $36.73 $35.41 $36.00 52% Bear $1,828 432 $2,261 $1.90 11.0x 6.0x 6.0x 5.0x $20.91 $18.87 $17.89 $19.00 (20%) Bull $2,727 539 $3,266 $3.39 13.0x 8.0x 8.0x 6.5x $44.06 $46.90 $45.16 $45.00 90% Street $2,143 453 $2,596 $2.38 12.5x 7.4x 7.4x 6.2x $29.80 $31.53 $30.36 $30.56 29%
10
Mark P. Frissora
Chairman & CEO
Elyse Douglas
Chief Financial Officer
There was one time when we had a customer complain to corporate. Frissora happened to be in town that week and showed up here unannounced in jeans and a sweater to figure out with us a way we could resolve the issue. Manager, Hertz Off-Airport Manhattan Location
11
Hertz has been profitable through cycles. During phases of weak demand, Hertz sells down its fleet to cut capacity and maintain stable pricing. In 2008 and 2009, Hertz reduced its fleet size by 1% and 10% and earned $237 and $199 (EBT) respectively We believe that Hertz's shift to off-airport locations, especially the non-cyclical insurance market, mitigates this risk
We believe that there is a high probability that Hertz, Avis, and Enterprise will avoid destructive price wars, especially given the changing incentives and price signaling seen from Hertz
Given Hertz's high financial leverage, rising interest rates may adversely impact profitability and FCF conversion
The option to sell HERC and use the sale proceeds to pay down debt mitigates this risk
12
Industry consolidation dramatically improves pricing environment Used car market risk is misunderstood Strong revenue growth opportunities in the U.S. and significant revenue and cost synergies from Dollar Thrifty acquisition Divestiture of Equipment Rental segment would unlock substantial value
13
Current Shareholders
Oscar Schafer Michael Smeets** Dan Monaco Dennis Hong Steve Bischoff Rivulet Capital Fir Tree Partners Fidelity Investments Altimeter Capital 40 North Industries
Industry Sources
Luke Froeb Tom Webb Neil Abrams Scott White John Hunt Former Chief Economist of the FTC Chief Economist of Manheim Leading Industry Source for Pricing Former Head of Bus Dev at Budget Hunt Ford Chrysler Dealer Principal
Sell-Side Analysts
David Lim Chris Agnew Wells Fargo MKM Partners
Supplementary Materials
15
Table of Contents
Appendix A: Thesis Industry Consolidation Used Car Market Growth Opportunities Dollar Thrifty Acquisition Equipment Rental Business Appendix B: Base Case Financials and Valuation Financial Summary EPS Bridge EBITDA Bridge Model Sensitivities Equity Trading Comps Sum-of-the-Parts Valuation Unit Economics Appendix C: Management Key Management Biographies Track Record Compensation Incentives 17 18 27 38 42 44 46 47 53 54 55 56 58 59 61 62 63 65 Appendix D: Ownership Private Equity Ownership Current Shareholder Base Appendix E: Additional Analysis Industrys Improved Pricing Sustainable? Rental Car Pricing Sources Why Hertz Over Avis? European Car Rental Market Economic Downturn Debunking Myths About Hertz Stock Price History Competitor Overview - Avis Fit with Pershing Square Criteria Appendix F: Downside Case Financials Appendix G: Upside Case Financials Appendix H: Team Member Bios 66 67 68 69 70 71 72 73 74 75 76 77 78 79 85 91
16
Appendix A: Thesis
17
2002
2007
2008
2009
2010
2011
2012
2013
18
19
70%
60% 50% 40% 30%
20%
10% 0% 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012
Source: Auto Rental News
20
Hertz 12%
Other 9%
Hertz 39%
Enterprise 33%
Enterprise 69%
21
Hertz has seen pricing improve since the Dollar Thrifty acquisition
22
10% 8%
6% 4% 2% 0% (2%) (4%)
Avis has seen pricing improve since the Dollar Thrifty acquisition
23
One of the headlines I'd like to make is we don't want to gain share by reducing price. We want to gain share by increasing value, and that's how we're doing it. Hertz CEO in April 2013
We've been very aggressive in initiating price increases over the last 4 months or so (post the Dollar Thrifty acquisition), and I think that's had a positive impact. What we watch for is the extent to which our competitors react to that with increases. And we've seen a fairly good matching of increases by both Hertz and the Enterprise. Avis CFO in March 2013
24
$55
2011 $45 $35 2012
2013
$25
Jan
Source: Rate-Highway
Feb
Mar
Apr
May
Jun
Jul
Aug
Sept
Oct
Nov
Dec
25
This resulted in consistent over-fleeting and under-utilization in the car rental market In order to increase utilization, car rental companies were incentivized to lower prices, ultimately resulting in a highly competitive pricing environment marked by low returns
As a result of the major restructurings of GM, Chrysler, and Ford, auto manufacturers have become much more rational with their production
This has significantly mitigated over-fleeting in the car rental market and increased utilization
Car rental utilization rates across the industry are at their all-time high
High utilization dis-incentivizes car rental companies from competing on price Renewed focus on returns and profitability
Restructuring in the Auto Manufacturing Industry marks a Structural Shift in Rental Car Pricing Environment
26
Manheim Used Car Value Index 100 105 110 115 120 125
130
90 Jan-05 Apr-05 Jul-05 Oct-05 Jan-06 Apr-06 Jul-06 Oct-06 Jan-07 Apr-07 Jul-07 Oct-07 Jan-08 Apr-08
95
Jul-08
Oct-08 Jan-09 Apr-09 Jul-09 Oct-09 Jan-10 Apr-10 Jul-10 Oct-10 Jan-11 Apr-11 Jul-11
Oct-11
Jan-12 Apr-12 Jul-12 Oct-12 Jan-13
27
Off-lease volumes are set to increase 55% by 2014. Off-lease vehicles directly compete with Hertz's supply of used cars, which put downward pressure on residuals
Ford, GM, and Chrysler drastically reduced vehicle leases during the financial crisis. Off-lease volumes today, which lag lease originations by 33 months, are close to an all-time low. We expect them to increase 6% in 2013 and 27% in 2014
By 2014, we expect an increase of 550,000 off-lease vehicles, which represents 42% of 2012 car rental sales
Despite the significant increase, we expect off-lease volume in 2014 to be less than that in 2008
Supply is definitely going to increase. The off-retail lease volume is a competitive impact. Tom Webb, Manheim's Chief Economist
28
Rationalized capacity at Big 3 automakers means that practices that destroyed residual values will be gone: big incentives, high dealer inventories, excessive lease subsidies, and short rental cycles
Rapid changes in technology has changed the way dealers and individuals buy cars
58% of used car buyers say the Internet was the most influential element in their vehicle search
The shift to a risk model means that OEM excess capacity is no longer pushed through to rental car companies, which leads to a more rational supply and protects residual values
Fewer national used car market inefficiencies leads to structurally higher residual values The average distance between buyers and sellers is 190 miles for local auction purchases vs. 439 miles for online purchases
29
Increasing average fleet holding period by three months decreases depreciation/unit/month by 0.6%
In the past, pricing has increased after significant declines in used car residual values (72% R-squared)
30
While people are forecasting this headwind from a drop in the Manheim Index, we are not experiencing it. It's due to the shift in channels, where we're selling the cars and how we're selling them, and that's improving our fleet costs. Is [lower depreciation] sustainable? We believe it is sustainable in our business model. We believe that used cars are probably the most liquid currency out there, and that if you look at over the last 40 years used cars have always held their value. I mean, after 9/11 they bounced back in four months. After 2008, 2009 they bounced back in six months to higher levels than they were before. We feel really good about fleet costs continuing to go down, based on only being about 50% of the way deployed on the car channel shift. -- CEO Mark Frissora
Jul-11
Apr-12
Feb-11
Sep-11
Feb-12
Jul-12
May-11
May-12
Sep-12
Oct-11
Jun-11
Jun-12
31
20%
0% 2009 2010 2011 2012 2013E
20%
0%
2014E
2015E
2012
2013E
2014E
2015E
% of Pct Fleet Sold Sold through Other Channels of Fleet - Other Channels
80%
60% 40% 5% 2009 6% 2010 7% 2011 7% 2012 7% 2013E 7% 2014E 7% 2015E
0%
The shift away from auctions into more profitable resale channels mitigates the expected drop in used car prices
32
Extra Interest and Depreciation Price Differential Transportation to Auction Auction Reconditioning Fees Auction Sales Fee
Price Differential
$800 $600 $400 $200 $0 $75 $90 $1,035 Transportation to Auction Auction Reconditioning Fees
$100
Premium Over Auction Retail/Rent2Buy
Retail/Rent2Buy and Dealer Direct offer significant premiums over the auction channel
33
34
We expect the shift to Dealer Direct sales to increase utilization and decrease fleet cost
35
Capitalization Costs
Hertz has moved to a significantly more diverse fleet
Since the spin-off from Ford in 2005, Hertz has reduced its reliance on Ford and General Motors from 57% of purchases to just 38% today
100%
80% 60% 40% 43% 33%
17%
40%
16% 13%
25%
20%
0%
Consolidation concentrates vehicle purchasing and increases buyer power Deep analytics on trim packages minimizes depreciation/unit/month
Avg # of Cars
New software packages ensure that vehicles have the trim packages that balance customer satisfaction, capitalization costs, and residual values This analysis significantly reduced purchases of exotic trim packages on cars for leisure customers
600,000
500,000 400,000 300,000 Donlen International (Hertz and Dollar Thrifty)
200,000
100,000 2010 2011 2012
36
Fleet Efficiency
Increases in fleet efficiency can significantly reduce costs
79.0%
Synergies from Dollar Thrifty opposite demand schedules means that Hertz's excess supply of weekend cars get used at Dollar Thrifty Technological Changes kiosks, Hertz On Demand, and mobile apps, reduce the need for staffed locations and expand hours to 24/7 The Shift to the Dealer Direct Remarketing Channel reduces the time cars spend grounded by up to 16 days, which saves approximately $10 per day in depreciation and interest expense We expect these factors to increase utilization by 130bps to 80.5% by 2015
76.0%
74.0% 72.0%
70.0% 77.5% 78.0% 78.5% 79.0% 79.5% 80.0% 80.5% U.S. RAC Fleet Efficiency
37
Growth is Accelerating
Off-Airport Locations
3,000 2,500 2,000 1,500 1,000 2005 2006 2007 2008 2009 2010 2011 2012 2004-2008: +5.5% CAGR
While off-airport revenue per day is lower than that in airport markets, rental periods are longer, leading to higher utilization and lower costs The insurance replacement market is particularly attractive, with long rental periods and stable revenues and profits, even in economic downturns Changes in technology (Hertz On Demand, kiosks) reduce the up-front investment costs, making this market expansion particularly attractive We expect off-airport locations to grow by >10% per year through 2015
38
ExpressRent Kiosk
iPhone App
Hertz can use technology to leapfrog Enterprise on offairport markets Opens up body shops, car dealerships, and hotels to Hertz rental cars. Requires a modest $6000 kiosk investment
70% of Hertz On Demand customers used mobile apps Mobile check-in increases labor productivity and customer satisfaction Investors underestimate the impact of these volumeenhancing product and service improvements. Buyside Investment Analyst
How it works
iPhone App: Text message after plane lands notifies customer where their car is located. Eliminates the need to stop by the counter 24/7 kiosk: Videophone connects to agent in Oklahoma, City who guides customer through the process. Customer scans driver's license at kiosk
39
Scale: approximately 500,000 U.S. rental cars by 2014 vs. 9,700 for ZipCar No membership required and free to join, compared to Zipcar's $25 application fee and $60/year Second-mover advantage
Cheaper and better technology Does not have to educate the public about car sharing
Reduces Costs
40
E.g. Hertz Value Lease expands Donlen's product offering to large companies by leveraging Hertz's rental car network Revenue growth is accelerating. We expect 2012 revenues of ~$460 million to grow by 16% to $534 million
Our primary research discovered that Donlen has significant expertise in sourcing and remarketing that will be a substantial benefit to Hertz as it continues to move away from program cars
Donlen is the best remarketer I've ever seen. Former Hertz Licensee
Our Donlen acquisition has turned out to be a much better acquisition than we anticipated. The revenue synergies that we're getting out of this acquisition are large. CEO Mark Frissora
41
Purchase Price
Deal Structure
100% cash consideration Antitrust clearance required Hertz to divest its Advantage brand Advantage divestiture (~$30 million of Corp. EBITDA) Highly attractive transaction for HTZ owners EPS accretion & positive EVA Including impact of Advantage divestiture (~$30 million of Corp. EBITDA) Estimated $600 million in synergies Acquisition multiple of 2.6x EV/EBITDA (including synergies)
Transaction Benefits
42
43
44
United Rentals (NYSE:URI) is the market leader with 13% share Sunbelt Rentals (LSE:AHT) is 2nd with 5% market share HERC is 3rd with 4% market share
We spoke with an analyst who asked the CEO if he foresees any FTC issues with regards to an acquisition of HERC by United Rentals or Sunbelt Rentals. He replied that has already looked into it and there would not be any issues
Other 78%
Issue debt at HERC level, transfer the proceeds of debt issuance to parent (Hertz Global Holdings), and then spin-off HERC Sell HERC after six months to qualify for tax-free treatment under IRS Section 355(e) Safe Harbor rule
We've always maintained the position that if there was a reason to divest it that was shareholder friendly, we're not resistant to looking at other things and other variables in terms of the equipment rental business. Hertz CEO in February 2013
An outright sale of HERC could also be pursued based on the cost-basis (undisclosed) of HERCs historical acquisitions
45
46
47
Expenses: Direct Operating 4,930 4,084 4,283 4,566 4,796 Deprec. of revenue earning equip, leases 2,194 1,931 1,868 1,906 2,148 SG&A 769 641 665 745 946 Interest Expense 870 680 773 700 650 Interest Income 25 65 12 6 5 Impairments, Others 1,169 0 0 63 36 Total Expense 9,907 7,272 7,577 7,974 8,570 GAAP Pre-Tax Income (1,382) (171) (15) 324 451 Adjustments for non-cash and non-recurring items: Purchase Accounting 101 90 90 88 110 Non-Cash Debt Charges 100 172 183 130 84 Other charges 1,419 108 89 138 258 (Restructuring Charges, Derivative Loss, Pension Adjustment, Acquisition Charges, Other) Total Adjustments 1,620 370 362 356 451 Adjusted Pre-Tax Income 238 199 347 681 901 Cash Tax 83 70 121 238 315 Less: Noncontrolling interest 21 15 17 20 0 Net Income to Hertz 134 115 208 423 586 Diluted EPS $0.41 $0.31 $0.51 $0.95 $1.31 Bloomberg Consensus: Fully Diluted Share 323 372 412 445 448
6,004 3,082 1,655 614 7 0 10,747 2,307 150 103 0 254 2,561 896 0 1,665 $3.53 471
6,132 3,191 1,697 551 7 0 10,964 2,501 155 105 0 260 2,761 966 0 1,795 $3.79 473
48
49
50
51
500 $ 500 $ 500 $ 500 $ 500 $ 500 $ 500 $ 500 $ 500 $ 500 1,300 1,300 1,300 1,300 1,100 1,100 1,100 1,500 1,500 1,500 5.2% 0.6% 0.5% 7.1% 1.0% 5.6% (2.7%) (2.8%) -
150 $
250 $
300 $
100 $
200 $
300 $
200 $
300 $
300
52
53
54
Model Sensitivities
Sensitivity to U.S. RPD Growth Y/Y -2.5% 0.0% 2.5% 5.0% 2014e EBITDA $2,445 $2,610 $2,922 $3,239 2014e EPS $2.22 $2.44 $2.87 $3.31 Price Target $28.06 $30.80 $36.02 $41.34 Sensitivity to U.S. Enplanements Y/Y 0.0% 1.8% 3.5% 5.3% 2014e EBITDA $2,852 $2,887 $2,922 $2,957 2014e EPS $2.78 $2.83 $2.87 $2.92 Price Target $34.86 $35.44 $36.02 $36.60 7.5% $3,562 $3.76 $46.74 2014e EBITDA 2014e EPS Price Target Sensitivity to Fleet Utilization 78.3% 79.3% 80.3% 81.3% $2,872 $2,897 $2,922 $2,946 $2.80 $2.84 $2.87 $2.91 $35.19 $35.61 $36.02 $36.42 82.3% $2,970 $2.94 $36.81
Sensitivity to Manheim Index Y/Y -8.0% -6.0% -4.0% -2.0% 2014e EBITDA $2,755 $2,838 $2,922 $3,006 2014e EPS $2.65 $2.76 $2.87 $2.99 Price Target $33.38 $34.70 $36.02 $37.35
Impact of Used Car Prices and Resale Channel Mix 2012 2014e Scenarios Actual Base Down Channel used car resale price relative to Auction channel Dealer Direct $500 $500 $500 Retail & R2B $1,300 $1,300 $1,100 Share of Vehicles Sold via Channel Dealer Direct 47% 48% 47% Retail & R2B 13% 33% 13% Auction, other 40% 20% 40% EBITDA $1,607 $2,922 $2,280 EPS $1.31 $2.87 $1.92 Price per Share Estm. $36.02 $19.37
55
16,626 5,382
14% 6% 10%
26% 6% 16%
$51.69 $9.31
4,871 4,658
11,888 6,301
56
Historical Comps
57
Sum-of-the-Parts Valuation
We use a forward EV/EBITDA range of 6.0x-8.0x for the Car Rental segment Our base case multiple is Hertz's current NTM EV/EBITDA of 7.4x
($ in millions except per share) Revenue (2014e) Car Rental Equipment Rental Total EBITDA (2014e) Car Rental Equipment Rental Total Forward EV / EBITDA Car Rental Equipment Rental Enterprise Value Car Rental Equipment Rental Total
Base
Bear
Bull
However, we believe Hertz's valuation could re-rate to its historic average EV/EBITDA of 8.5x given industry dynamics, improving pricing, strong execution by management team especially on integration of Dollar Thrifty, and efficient capital allocation with potential for cash returns in the next 18 months
10,361 9,630 10,457 1,589 1,560 1,619 $11,952 $11,192 $12,078 2,413 1,828 2,727 509 432 539 $2,922 $2,261 $3,266 7.4x 6.0x 8.0x 6.2x 5.0x 6.5x 17,854 10,970 21,814 3,158 2,139 3,505 $21,012 $13,109 $25,320 (6,184) (6,259) (5,894) 1,828 1,677 1,756 (227) (227) (227) $16,430 $8,301 $20,954 $35.41 $17.89 $45.16 49% (25%) 90%
We use a forward EV/EBITDA range of 5.0x-6.5x for the Equipment Rental segment
The Equipment Rental companies currently trade at an average 6.2x forward EV/EBITDA and historically traded in the 2.4x-7.5x range
Less: Debt (2013e) Plus: Cash (2013e) Less: Unfunded Pension Obligation (2013e) Excess Value Price per Share Upside to Current Price
58
Unit Economics
Per Car in US$ units 2008 Average Rate per Day Growth Y/Y Number of Transaction Days Utilization Rental Rate Sales Fleet Interest Expense % of Sales Fleet Depreciation Expense % of Sales Operating Profit before DOE % of Sales Direct Operating Expense % of Sales SG&A % of Sales Operating Profit % of Sales NOPAT % of Sales ROIC $44.31 nm 281 77.1% $12,461 $989 7.9% $4,029 32.3% $7,444 59.7% $4,272 34.3% $1,106 8.9% $2,065 16.6% $1,342 10.8% 21.7% 2009 $43.68 -1.4% 286 78.5% $12,513 $764 6.1% $3,904 31.2% $7,845 62.7% $4,337 34.7% $1,100 8.8% $2,408 19.2% $1,565 12.5% 25.2% 2010 $43.14 -1.2% 286 78.3% $12,323 $901 7.3% $3,582 29.1% $7,840 63.6% $4,227 34.3% $1,036 8.4% $2,577 20.9% $1,675 13.6% 27.0% 2011 $41.33 -4.2% 287 78.6% $11,858 $696 5.9% $2,683 22.6% $8,479 71.5% $3,988 33.6% $1,021 8.6% $3,470 29.3% $2,256 19.0% 36.4% 2012 $40.01 -3.2% 289 79.3% $11,577 $615 5.3% $2,821 24.4% $8,140 70.3% $3,719 32.1% $1,153 10.0% $3,269 28.2% $2,125 18.4% 34.3% 2013e $40.69 1.7% 292 80.0% $11,880 $458 3.9% $2,837 23.9% $8,585 72.3% $3,488 29.4% $1,183 10.0% $3,913 32.9% $2,544 21.4% 41.0% 2014e $41.40 1.7% 293 80.3% $12,128 $430 3.5% $2,852 23.5% $8,847 72.9% $3,420 28.2% $1,208 10.0% $4,219 34.8% $2,742 22.6% 44.2% 2015e $41.40 0.0% 294 80.5% $12,169 $401 3.3% $2,852 23.4% $8,916 73.3% $3,363 27.6% $1,212 10.0% $4,341 35.7% $2,822 23.2% 45.5% 2016e $41.40 0.0% 294 80.6% $12,171 $386 3.2% $2,852 23.4% $8,934 73.4% $3,328 27.3% $1,212 10.0% $4,393 36.1% $2,856 23.5% 46.1% 2017e $41.40 0.0% 294 80.6% $12,173 $369 3.0% $2,852 23.4% $8,952 73.5% $3,293 27.0% $1,212 10.0% $4,447 36.5% $2,891 23.7% 46.6%
59
Debt Maturity
Corporate Debt Maturity Schedule ($ mn) (Weighted Average Interest Rate 5.51%)
$3,000 $2,500 $2,000 $2,081 $1,500 $1,000 $500 $475 $700 $195 '15 '16 '17 Fixed '18 Floating '19 '20 '21 '22 '28 $1,250 $700 $500 $500
$0
'13 '14
60
Appendix C: Management
61
Mark P. Frissora
Chairman & CEO
Elyse Douglas
Chief Financial Officer
Scott Sider
President, Vehicle Rental
62
63
Given management's impressive track record, we believe they are extremely conservative in nature and the $600 million Dollar Thrifty synergies estimates is very achievable
64
Based 40% on Economic Value Added (EVA). This incentive was introduced in 2010 and increased in 2011
Increases in EVA are highly correlated with shareholder returns The increased weighting reflects management's confidence in generating returns on capital above its cost of capital over the long term $300 million of incremental EVA has been generated since 2009 Hertz's top 400 managers are paid based on EVA
Based 40% on adjusted pre-tax income Based 20% on revenue CEO Mark Frissora owns 1.4% of the company
I think the competitors have all settled on the market share numbers that they're at right now. I don't think anyone in the industry is looking to cut price. The fleets right now are adequate, so we feel pretty good about the fact that the industry is very rational. CEO Mark Frissora
We have a very EVA/asset-light strategy focus in the company today. We have a very positive movement in economic value added, 40% of my bonus and the top 400 managers in the Company is tied to EVA. CEO Mark Frissora
65
Appendix D: Ownership
66
Sponsors Ownership %
80% 60% 40% 20% 0% 72% 55% 55% 51% 51% 38% 26% 13%
In the past six months, the Sponsors sold 110 million, reducing their stake from 38% to 13%
2006
2007
2008
2009
2010
2011
2012
2013
67
68
69
2 Since the Dollar Thrifty acquisition closed in November 2012, Enterprise has matched the price increases by Avis
and Hertz
3 It no longer makes sense to lower prices because none of the three remaining players have dominant market share.
If Enterprise lowers prices, Hertz and Avis will follow and no one will gain market share. Lower pricing would only result in lower profitability for all three players
4 Due to auto OEM restructurings and more rational car production, car rental companies finally have right-sized
fleets. With utilization rates at all time highs, there is no longer incentive to lower prices to raise utilization rates
70
Sell-Side Analysts
Our research suggests rental car pricing in 1Q13 continued to firm, and was likely up year-over-year throughout the quarter. In regards to monthly performance, improvements in March were the strongest of the quarter. Northcoast Research, April 2013 Avis initiated another price increase effective for Apr 8, which was quickly followed by Enterprise. Morgan Stanley, March 2013
We instituted 2 price increases for January, 2 for February and 2 effective for March rentals. January pricing was up yearover-year, more in fact than December was, and our existing reservations give us a measure of confidence that pricing could end the quarter being positive. Avis CEO, February 2013
USA Today
Enterprise says rates at some of the top 200 airports their brands serve were up to 4% higher in February than during that month last year. USA Today, February 2013
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2006, Hertz has beaten managements guidance every year except for in 2008 and the company has beaten consensus estimates for the past 15 quarters in a row. Prior to joining Hertz in July 2006, Frissora had a phenomenal track record at Tenneco
During Frissoras tenure as CEO of Tenneco (1999-2006), the company dramatically improved its operating efficiency and financial performance, which translated into significant increases in Tennecos market capitalization. In 2004, Tenneco earned the industrys top award for auto supply companies, which recognized the company for delivering the highest shareholder returns 158% in one year and 745% in three years of any global automotive supplier
2 Dollar Thrifty Acquisition: After taking into account synergies, Hertz paid less than 3.0x EBITDA to acquire
Dollar Thrifty, which we believe was a very prudent deal for management
3 Zipcar Acquisition: In March 2013, Avis acquired Zipcar for $500 million to enter the Hourly Rentals segment.
Hertz acquired technology to implement hourly rental capabilities in its fleet and will have its entire fleet upgraded with hourly rental technology by 2014 for a fraction of the cost
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Europcar 21%
Pre-Tax Margin Pre-Tax Income Taxes @ 35% Net Income Shares Outstanding EPS Impact
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Economic Downturn
The rental car industry is not as cyclical as intuition would suggest.
During phases of weak demand, car rental companies cut down their fleet size by selling cars This reduces capacity, balancing supply-demand and keeping pricing stable During 2008 and 2009, Hertz generated pre-tax income of $237 and $199 respectively by reducing fleet size by 1% and 10% respectively to maintain supply-demand balance Furthermore, Hertz's mix shift to off-airport locations, especially the non-cyclical insurance market, mitigates risk of cyclical earnings and cash flows
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Car rental is a good business, as evidenced by a long history of relatively stable market share among competitors and a recent history of >10% ROICs.
Hertz's subpar profitability from 2005-2009 was the result of inefficient operations, excess capacity in U.S. auto makers, and poor fleet management. These issues are now fixed. Over 37% of transactions were made by Hertz Gold Club Members. Gold Club Members are 3x more likely to rent from Hertz over other companies. The company has a 99.3% retention rate on corporate contracts. Over 40.5 million used cars were sold in the U.S. in 2012 the used car market is extremely large, efficient, and liquid. After 9/11, used car prices rebounded in four months. After the financial crisis, prices bounced back in six months. All rental car companies are equally affected by changes in used car prices. If prices fall more than expected, rental car companies can raise prices to maintain profitability (72% R-squared). Lower used car prices are correlated with lower new car prices (81% R-squared).
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Rental Locations
With the acquisition of Dollar Thrifty, the Company has over 10,000 locations across the United States and 17 other countries
North America Avis Company-operated Licensee Total Avis Budget Company-operated Licensee Total Budget Combined
NA 68%
Revenue Breakdown
Truck Rental 5%
Segment
Intl Car Rental 32%
Geography
Intl 32%
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Criteria Expected Profit ($MM) Expected Return (IRR) Upside/Downside Realization Horizon Target TEV Buy Liquidity Sell Liquidity Domicle Strategy Corporate Resilence Governance Stance Value Ascertainability
Ideal $300+ 40%+ 4 to 1 1 year $5bn+ 2 months 2 months Domestic (English) Value/Large MoS Intrinsic Uncontrolled Passive High
Acceptable $150+ 25%+ 3 to 1 2 years $2bn+ < 3 months < 3 months Foreign (English) Value/Free Growth Extrinsic/Deep Value Rational Large Shareholder Active Moderate
Hertz $300+ 50%+ 2.6 to 1 1 year $16bn 1.5 months 1.5 months Domestic (English) Value/Free Growth Intrinsic Uncontrolled Passive High
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Expenses: Direct Operating 4,930 4,084 4,283 4,566 4,796 Deprec. of revenue earning equip, leases 2,194 1,931 1,868 1,906 2,148 SG&A 769 641 665 745 946 Interest Expense 870 680 773 700 650 Interest Income 25 65 12 6 5 Impairments, Others 1,169 0 0 63 36 Total Expense 9,907 7,272 7,577 7,974 8,570 GAAP Pre-Tax Income (1,382) (171) (15) 324 451 Adjustments for non-cash and non-recurring items: Purchase Accounting 101 90 90 88 110 Non-Cash Debt Charges 100 172 183 130 84 Other charges 1,419 108 89 138 258 (Restructuring Charges, Derivative Loss, Pension Adjustment, Acquisition Charges, Other) Total Adjustments 1,620 370 362 356 451 Adjusted Pre-Tax Income 238 199 347 681 901 Cash Tax 81 68 118 231 306 Less: Noncontrolling interest 21 15 17 20 0 Net Income to Hertz 136 117 212 430 595 Diluted EPS $0.42 $0.31 $0.51 $0.97 $1.33 Bloomberg Consensus: Fully Diluted Share 323 372 412 445 448
5,602 3,379 1,545 608 6 0 10,527 1,458 140 98 0 238 1,696 577 0 1,120 $2.38 471
5,710 3,516 1,580 541 7 0 10,741 1,585 144 100 0 244 1,828 622 0 1,207 $2.55 473
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Expenses: Direct Operating 4,930 4,084 4,283 4,566 4,796 Deprec. of revenue earning equip, leases 2,194 1,931 1,868 1,906 2,148 SG&A 769 641 665 745 946 Interest Expense 870 680 773 700 650 Interest Income 25 65 12 6 5 Impairments, Others 1,169 0 0 63 36 Total Expense 9,907 7,272 7,577 7,974 8,570 GAAP Pre-Tax Income (1,382) (171) (15) 324 451 Adjustments for non-cash and non-recurring items: Purchase Accounting 101 90 90 88 110 Non-Cash Debt Charges 100 172 183 130 84 Other charges 1,419 108 89 138 258 (Restructuring Charges, Derivative Loss, Pension Adjustment, Acquisition Charges, Other) Total Adjustments 1,620 370 362 356 451 Adjusted Pre-Tax Income 238 199 347 681 901 Cash Tax 81 68 118 231 306 Less: Noncontrolling interest 21 15 17 20 0 Net Income to Hertz 136 117 212 430 595 Diluted EPS $0.42 $0.31 $0.51 $0.97 $1.33 Bloomberg Consensus: Fully Diluted Share 323 372 412 445 448
6,239 2,882 1,685 490 7 0 10,688 2,652 154 105 0 259 2,911 990 0 1,921 $4.08 471
6,470 2,984 1,739 450 8 0 11,036 2,827 160 107 0 267 3,094 1,052 0 2,042 $4.31 473
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Stephen Lieu (SLieu14@gsb.columbia.edu) Stephen is a first-year student at Columbia Business School. Stephen is Co-President of the Columbia Student Investment Management Association. Prior to CBS, Stephen worked for four years in investment banking and private equity. Stephen received a B.S. in Economics from the Wharton School, University of Pennsylvania. Rahul Raymoulik (RRaymoulik14@gsb.columbia.edu) Rahul is a first-year student at Columbia Business School. Prior to business school, Rahul was a Sector Specialist at Fidelity Investments, initially in Boston and later in Tokyo. Rahul focused on the media and telecom industries in the U.S. and the technology industry in Asia. Rahul received a B.S. in Information Science from Northeastern University and an M.S. in Finance from Boston College.
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