Bidding for Hertz: Leveraged Buyout Case
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The dual-track process used by Ford to initiate “consideration of strategic alternatives” makes the bidding process for Hertz more difficult. The bidding group has to spend more time to gather more information required for the process. To be able to give out an acceptable price, which maximizes the value for Ford, the cost the group has to put to buyout is also higher. Longer time to collect the information means the group lose its competitive advantages to competitors since the information they got, also is revealed by the competitors. We believe Hertz is an ideal leveraged buyout target because it has most of the criterias required. Hertz has a strong and stable free cash flow which is from its car rental and equipment rental revenue. It also has the operational improvement if it is bought by the group. The debt level of Hertz is high, so the group should have some changes to make the debt rate lower. Hertz’s two business segments presented large opportunities for operational improvement.
The rental car business segment can be increased in revenue by having some logical strategies to change the key drivers such as the number of transactions, the length of each rental, revenue per rental day, and fleet utilization. The other business segment, equipment rental is inefficient use of capital. Compared to its competitors RSC and United Rentals, the return were expected to be 85% and 116%, respectively; HERC’s return was projected to be 70.5% only. Therefore, if the group can make some changes to help it improved, it can be a big value-creating opportunity. The key assumptions that underlie the Bidding Group’s projections are very realistic. They project the car-rental growth to slow to 4.5% which is a very conservative, yet realistic projection. They also project $400 million in operational savings. Exhibit #9 has the largest impact on returns as it projects a big savings.
Exhibit #8 and #10 would also have an impact on returns but because they only slightly lower the growth rate they will not have the same impact that Exhibit #9 will have on returns. Based on the base-case estimates in case Exhibit 8, 9, and 10 and our estimates of terminal value, if the bidding group put up 2.3 billion dollars to buy Hertz’s equity, the return they can expect to earn is 18.8% (Figure 1: a table from excel file) If Carlyle desires a 20% target return on its equity investment, according to our analysis, 2.3 billion dollars is too much for them to pay for. The more money they want to pay, the less return they should get. In this situation, they only need to pay 2.19 billion dollars to have a 20% target return. (Figure 2: a table from excel file)