Bidding For Hertz: Leveraged Buyout Essay

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April 17, 2009BIDDING FOR HERTZ LEVERAGED BUYOUTOverviewIn tardy summer 2005, Greg Ledford, managing director and head of automotive and transportation buyouts at the Carlyle free radical, found himself examining his BlackBerry atop the Great Wall of China. Though he had planned to be sightseeing with his daughter, his immediate focus was to finalize the terms of the second-largest leveraged buyout in history. The target in question was oscillation, a subsidiary of the cross Motor Company, which was up for sale. Ledford postulate to decide the price he and his co-investors would offer for bicycle as well as assess the potential returns and risks of the deal. Already months of work, many do llars of collect diligence, and arrangement of doubtful financing had gone into the bid. Complicating matters, he knew he faced tough competition from a rival buyout group, no doubt engaged in a standardized process.The race to win Hertz had been set in motion several months earlier, when William Clay Ford Jr., the chairman and CEO of Ford, announced plans to explore strategic alternatives for Hertz in April 2005. That announcement was followed in June 2005 by the filing of an S-1 registration statement setting up a dual track process that would result in a Hertz IPO should other sale prospects fail. Ledford, who spoke to senior Ford managers on a regular basis, had gleaned that there was interest on Fords part for an outright sale of Hertz. He believed a private sale that was competitive with an IPO would be viewed favorably by Ford due to its greater upfront cash proceeds and certainty of execution. When no strategic buyer surfaced, Carlyle, Clayton, Dubilier & Rice (CD&R), and Merrill Lynch Global PrivateEquity (collectively Bidding Group) joined forces to bid on Hertz. It faced competition from another buyout consortium that included Texas Pacific Group, Blackstone, Thomas H. Lee Partners LP, and Bain Capital LLC.This case was prepared by Susan Chaplinsky, Professor of Business Administration, Darden Graduate School of Business, and Felicia Marston, Professor, McIntire School of Commerce. It was written as a basis for class discussion rather than to illustrate impressive or ineffective handling of an administrative situation. Copyright 2008 by the University of Virginia Darden School Foundation, Charlottesville, VA. All rights reserved. To order copies, send an e-mail to salesdardenbusinesspublishing.com. No part of this military issue may be reproduced, stored in a retrieval system, used in a spreadsheet, or transmitted in any form or by any meanselectronic, mechanical, photocopying, recording, or otherwisewithout the permission of the Darden School Foundation. Rev. 4/09.UVA-F-1560Hertz Ownership HistoryHertzs ownership history was characterized by a series of sales, public offerings, and leveraged buyouts (Exhibit 1).1 The company was first established in 1918 by 22-twelvemonth-old Walter L. Jacobs as a car rental operation with a underage inventory of 12 Model T Fords that Jacobs personally had repaired and repainted. The venture was immediately successful, leading Jacobs to expand and generate annual revenues of approximately of $1 million deep down five years. At the $1 million mark, in 1923, Jacobs sold his company to John Hertz, president of Yellow Cab and Yellow Truck and Coach Manufacturing Company, who gave his name to the company, creating Hertz Drive-Ur-Self System and a brand name that had endured ever since.John Hertz sold his investment three years later to General Motors (GM). In 1953, GM in turn sold the Hertz properties to the Omnibus Corporation, which simplified the companys name to The Hertz Corporation in connection with a public stock offering on the New York Stock Exchange (NYSE). In late 1987,together with Hertz management, Ford Motor Company participated in a management buyout of the company. Hertz later became an independent, wholly owned subsidiary of Ford in 1994. Less than three years later, Ford issued a nonage stake of shares through a public offering on the NYSE on April 25, 1997. In early 2001, Ford reacquired the outstanding shares of Hertz and the company once again became a wholly owned subsidiary of the Ford Motor Company.Hertz Financial History and Business SegmentsThe large investor interest in Hertz everyplace time was due in part to the companys proven financial ability. In fact, the company had produced a pretax profit each year since 1967. During the purpose 1985 to 2005, revenues had grown at a compound annual growth rate of 7.6% with positive year-over-year growth in 18 of those 20 years. Over the past same period, Hertz had emerged as a truly global enter prise it had car rental operations in 145 countries, and more than 30% of its total revenues were from extraneous of the United States. Hertz was among the most globally recognized brands and had been listed in BusinessWeeks 100 Most Valuable Global Brands (limited to public companies) in 2005 and every year since it was eligible for inclusion.Hertz currently operated in two business segments car rental (Hertz Rent A Car or RAC) and equipment rental (Hertz Equipment Rental Company or HERC). In 2005, it was estimated that RAC would comprise 81% of company revenues and HERC 19%. RAC was supported by a network of franchises that together with company-owned facilities operated in more than 7,600 airport and local locations throughout the world. The company led its competition in the airport car rental market in Europe with operations at 69 major airports. Hertz owned and leased cars from more than 30 manufacturers, most of which it had long-term leasing.