Hertz and Avis are putting stockholders in the driver's seat
The car rental business is undergoing a revolution of sorts, becoming more independent as it drifts away from the ownership control of the nation's largest auto makers like Ford Motor Company.
For proof, look no further than the recent initial public offerings of industry leaders Hertz and Avis. Not only have both IPOs earned millions for their parents, they've combined to shore up a weaker-than-usual IPO market, which is off 40 percent in 1997 compared to 1996.
Hertz Corp, a subsidiary of Ford Motor Company until it went public in the spring, is the recognized world leader in the car rental business, with 5,000 rental locations in 140 countries and a rental fleet of about 400,000 vehicles. Its equipment rental arm is also number one in its niche; and Hertz has branched out into the potentially lucrative telecommunications business with its Hertz Technologies division.
The company earned $3.5 bn in 1996, with net income of $158 mn, a 5.5 percent increase from 1995, and it controls 29 percent of the US car rental market.
Spin City
Ford spun off a 19 percent slice of Hertz in the April IPO, which saw the stock roll out at $24 per share, rise to $39 in mid-July then settle back to $35 by mid-September, earning the auto giant $400 mn after the smoke cleared. Ford had sold its other car rental property, Budget Rent-A-Car, for $1.7 bn back in 1996.
Avis Rent A Car Inc, after its September IPO, is the largest franchisee of Avis Inc, with 540 locations in North America, 4,200 outlets worldwide and an inventory of 174,000 vehicles. The Garden City, New York-headquartered company controls about 25 percent of the national car rental market, earning $1.8 bn in 1997 with a net income of $40 mn, a 15 percent increase over 1995.
The $330 mn IPO resulted in Avis parent HFS, the real estate and hotel giant that purchased the company from General Motors and Avis shareholders in 1996 for $793 mn, liquidating 75 percent of its share in the company. HFS will continue to be the principal owner of the Avis brand, but it will license the name to Avis for an annual fee of 4 percent of net sales, according to Avis officials.
The Avis IPO, which offered 15.6 mn shares in the US and Canada and 3.9 mn shares overseas, kicked off at about $17 per share. Roughly 28 mn shares are outstanding after the offering. HFS has said it will use $210 mn from the IPO to repay company debts related to the acquisition of the company last year.
Revving Up
So why this sudden burst of IPO activity in the staid car rental market? And how will Avis get on compared to the indisputable success of Hertz's IPO?
There's no shortage of opinions. 'I think the automobile rental business is really moving in high gear,' says Ken Fleming, an IPO analyst with Renaissance Capital in Greenwich, Connecticut. 'In general, the trends have been favorable in the rental car business with more public ownership than in the past. Plus, there are high barriers to entry and growth should continue for both Hertz and Avis.'
Fleming says that, in the long run, Hertz should perform better than Avis, primarily because it's done a better job of building off of its core business. 'I think Hertz was a bigger and more diversified public offering,' he adds. 'They have a huge equipment rental operation and some other businesses going, whereas Avis just has the car rental business. That's a big advantage for Hertz.'
That's also one reason why Ford decided liquidating 19 percent of its interest in Hertz was a good idea. 'We got some fine value out of a great asset,' says Chris Vinyard, a spokesperson for Ford. 'We enjoyed four years of record earnings with Hertz, which is the dominant player in the industry and has a superb earnings record with another great year lined up in 1997. But there really wasn't a market value for Hertz, which is another reason why we decided to float 19 percent of the company.'
Ford shareholders certainly aren't complaining. 'I'm 100 percent behind what Ford is doing, both with Hertz and the way it's running its core business,' says Max Myers, a retired Ford executive and shareholder who lives in Portland, Maine. 'The company's stock has always done well over the years and it's obvious that Ford knows what it's doing to keep it performing so highly.'
Boom Time
Both Avis and Hertz, analysts say, will benefit from a booming car rental market, which has grown 11 percent annually since 1992, according to The New York Times.
Avis suffers a bit in that the company has $3 bn worth of debt on its books, which could shred the company's already thin profit margins if interest rates to rise again. But Avis is less expensive than Hertz, which at its current stock price of $35 is trading at roughly 16 times earnings. At its IPO price of $16 per share, Avis is more reasonably priced and is trading at about 11 times 1997 projected earnings.
'I like our chances,' says Kevin Sheehan, Avis's chief financial officer. 'I think the fact that the industry has changed for the better and is poised toward profitability bodes well for us.'
Sheehan also favors new ownership, saying that six years of dealing with auto dealers on his watch has grown stale. 'We've always had to deal with the auto companies and they've pretty much called the shots,' he say. 'Now, we'll be run by a board of directors who will bring some fresh views to the table. The IPO is really going to reposition us as a new, separate company and give us a great opportunity to build brand loyalty and value.'
Bred-in-the-Bone
One possible bone of contention in the Avis IPO is the fact that Avis Rent A Car (or ARAC, as it's called in the prospectus) doesn't pack the brand name wallop that many investors might think.
Under the terms of the deal with HFS, Avis's brand name, franchising division and on-line reservation system will all be retained by HFS. The owner of a nationwide chain of hotels like Ramada Inn and Days Inn, HFS should find the Avis name extremely valuable. For example, HFS could use the Avis reservation system to book hotel rooms. On the other hand, it could also use its hotels to market Avis car rentals and lock out competitors like Hertz.
Other industry observers comment that no matter what happens in the aftermath of the Avis IPO, HFS is going to have some problems recouping the $800 mn-plus purchase price it shelled out for Avis last year. HFS is out around $500 mn and it remains a 30 percent owner of a highly leveraged, one-trick pony company with a multiple that might be too much of a reach for serious investors.
IR & IPOs
One crucial if oft-overlooked factor contributing to the success of the Hertz IPO J or any good IPO for that matter J is the level of preparation the issuing company undertakes in managing the new issue.
Spearheading that role is the investor relations director. 'What the IR official is doing in handling an IPO is essentially trying to create awareness,' says Tony Schor, president of Investor Awareness, a Deerfield, Illinois-based investor relations firm. 'That's not a big problem with companies like Hertz and Avis, but it's a problem nevertheless. You want to position investor interest so that you have the market support so critical to an IPO's success after the first few days. You've got to sustain investor interest.'
For Hertz, that meant laying out an IPO blueprint that leaned heavily on roadshows to get the word out to analysts and institutional investors. 'As a result of the roadshows, the stock was oversubscribed at the time of the new issuance,' says Lauren Babus, investor relations director at Hertz.
Babus also worked to make sure retail investors J Hertz's core customers J weren't shut out of the IPO bonanza. 'It was a pretty decent mix of both retail and institutional investors: about 70 percent institutional and 30 percent retail.'
So what is Babus's advice to her IR counterparts at Avis? 'You've got to look internally and give as much responsibility as you can to the investor relations group, the earlier the better. Achieving relationships with the investor community is the key to a successful IPO and your IR people are the best means of achieving those relationships. I had been with Hertz over the years in a number of financial posts so it was easy for me because I knew the company and knew how Hertz worked. Getting an IR consultant on board, which a lot of people are doing these days when preparing an IPO, just slows down the process in my opinion.'
Avis will have to stretch to match the numbers that Babus and company posted for Hertz last April. And for now, it looks like Avis, as its infamous television commercials suggest, is going to have to try harder to keep up with its chief competitor.
Drive To Thrive J Hertz vs Avis
Vehicles | ||||
Locations | 1996 Sales | IPO Price | Offering Size | |
Hertz | 400,000 | 5,000 | $3.6 bn | $24 $400 mn |
Avis | 174,000 | 540 | $1.9 bn | $16 $250 mn |