26560031 case-study-hertz-corporation
DESCRIPTION
TRANSCRIPT
13.12.2007
Case Study:The Hertz Corporation
Presentation: Mariano Mateos, Ricardo Velilla, Elias Völker
Casestudy: The Hertz Corporation 13.12.2007 2
The Bid for Hertz
Casestudy: The Hertz Corporation 13.12.2007 3
Agenda
Deal StructureDeal Structure
How to create valueHow to create value
Hertz – Company OverviewHertz – Company Overview
Financial EngineeringFinancial Engineering
ConclusionConclusion
Casestudy: The Hertz Corporation 13.12.2007 4
Intro
Ford Motor Company
CD&ROther PE
firms
Hertz Corporation
Casestudy: The Hertz Corporation 13.12.2007 5
Hertz‘ business areas
Hertz
RAC
HERC
USA Europe
Region
Off/On-airports1,77 million cars$17 bln market revenues
180 largest airports
Off/On-airports12% share of the market
$10 bln market revenues
The third largest company
$1,2 bln revenue
The fourth largest company
$152 mln revenue
Casestudy: The Hertz Corporation 13.12.2007 6
Agenda
Deal StructureDeal Structure
How to create valueHow to create value
Hertz – Company OverviewHertz – Company Overview
Financial EngineeringFinancial Engineering
ConclusionConclusion
Casestudy: The Hertz Corporation 13.12.2007 7
Clayton, Dubilier & Rice Inc.
Private equity investment firm founded in 1978
Investments in 39 US and European businesses
Specialized in acquiring under-managed divisions
Has obtained a higher and steady return on investment
The case of Hertz
Casestudy: The Hertz Corporation 13.12.2007 8
First Stage: Uninteresting Bid
YEAR 2002
CD&R began studying the rental car business (RAC).
Early in its investigation, CD&R studied Budget and Alamo.
Hertz Much more attractive. Ford dismissed the proposal as
uninteresting and unfeasible. CD&R financing challenge
Securitizing Hertz‘s rental fleet in cooperation with Lehman Brothers and Deutsche Bank
New proposals.
YEAR 2003
CD&R convinced that Hertz‘s capital structure was inefficient.
New visit to Ford The deal could be indeed financed.
Hertz was non-strategic to Ford. Ford executives remained
unconvinced as well as Hertz‘s CEO.
Casestudy: The Hertz Corporation 13.12.2007 9
Second Stage: Ford sells
YEAR 2005
Early 2005 Ford core US auto business was in trouble. Monetizing Hertz One step to improve Ford balance sheet. Ford advisors recommended two tracks:
IPO Filed in June Sale of the business Proposal and preliminary bids by
July
Ford made confidential financing and operating information. Hertz executives Informational meetings with potential buyers. After a month of due diligence, CD&R identified several specific
opportunities for improving operations.
Casestudy: The Hertz Corporation 13.12.2007 10
Improving Hertz Operations
HERTZ
US RAC On-airport Operating Expenses
US RAC Off-airport strategy
European OpEx & SG&A
US RAC Fleet Costs
US RAC Non-Fleet CapEx
HERC ROIC
Casestudy: The Hertz Corporation 13.12.2007 11
Agenda
Deal StructureDeal Structure
How to create valueHow to create value
Hertz – Company OverviewHertz – Company Overview
Financial EngineeringFinancial Engineering
ConclusionConclusion
Casestudy: The Hertz Corporation 13.12.2007 12
Key Questions of Deal Structure
1. Can fleet be used as a source of debt capacity?
1. Can fleet be used as a source of debt capacity?
2. Can ABS financing be used for a levered buy out?
2. Can ABS financing be used for a levered buy out?
3. How can lenders be serviced and protected?
3. How can lenders be serviced and protected?
Casestudy: The Hertz Corporation 13.12.2007 13
Proposed Corporate Structure
The Hertz Corporation
Domestic Subsidiaries
HERCHertz Vehicle
FinancingHertz
International
OpCo
OpCo owns rest of Hertz‘s assets Conducts all rental transactions with
customers Leases fleet from FleetCo and
provides equity for FleetCo
FleetCo
Bankruptcy remote special purpose entities provide optimized securitization for asset backed debt financing
Leasing rates from OpCo cover debt payments
Casestudy: The Hertz Corporation 13.12.2007 14
Agenda
Deal StructureDeal Structure
How to create valueHow to create value
Hertz – Company OverviewHertz – Company Overview
Financial EngineeringFinancial Engineering
ConclusionConclusion
Casestudy: The Hertz Corporation 13.12.2007 15
Goals of new capital structure
Hertz should be able to survive a severe business downturn without need to restructure or defaultStability
Hertz should be able to exploit future growth opportunities without having to refinanceLiquidity
Capital structure should enable Hertz to make large car purchases and manage fluctuations in the rental activity
Flexibility
Funds should be obtained at significantly lower cost than current capital
Lower Costs
1
4
3
2
Casestudy: The Hertz Corporation 13.12.2007 16
The Layer Cake
FleetCo (in m$)Cash 526, 4
US Fleet ABS
Internat. Fleet ABS
5.256,7
1.972,4
Total FleetCo Debt 7.229,1
Fleet Enhancement Cars
Fleet Enhancement LC
Fleet Enhancement Cash
200
115,1
1.346,9
Total FleetCo Equity 1662,0
OpCo (in m$)
Sponsor Equity 2295,0
Total OpCo Equity 2295,0
ABL Facility 396
Term Loan B
Senior Unsecured Notes
1.850
2.250
Total OpCo Debt 5.296,0
Senior Sub Notes
Existing Debt
800
0
Total Capitalization: 16,482,1 m$
Casestudy: The Hertz Corporation 13.12.2007 17
Advantages
New capital structure highly leverages Hertz
Long term debt agreements ensure stability
Not all debt was drawn immediately, so liquidity and flexibility was ensured
Capital Cost are lowered through extensive use of asset backed facilities
Casestudy: The Hertz Corporation 13.12.2007 18
Calculation of Capital Cost
1. FleetCoAmount Interest in %
DebtUS Fleet ABS 5256,7 L+60 4,94%International Fleet ABS 1972,4 L+100 5,34%
EquityTotal Equity 1662 15,83%
WACC (FleetCo) 6,24%
2. OpCoAmount Interest in %
DebtABL Facility 396 L+250 6,84%Term Loan B 1850 L+300 7,34%Senior Unsecured Loan 2250 9,50%Senior Sub Notes 800 10,75%
EquitySponsor's Equity 2295 15,83%
WACC (OpCo) 9,66%
3. Hertz TotalAmount Interest in %
DebtTotal Debt 12525,1
EquityTotal Equity 3957
WACC (Hertz) 0,07817571 7,82%
4. AssumptionsBeta 1,5
Risk Free Rate 4,34%
Market Return 12%
Tax Rate 20%
Casestudy: The Hertz Corporation 13.12.2007 19
Agenda
Deal StructureDeal Structure
How to create valueHow to create value
Hertz – Company OverviewHertz – Company Overview
Financial EngineeringFinancial Engineering
ConclusionConclusion
Casestudy: The Hertz Corporation 13.12.2007 20
The Question
Both PE-groups bid around $5,4 bln for Hertz
Ford asks for a revised bid
CD&R are considering whether $5,6 bln are still a fair price...
Casestudy: The Hertz Corporation 13.12.2007 21
Original Valuation
This is what their valuation might have looked like...
Free Cash Flow & NPV Calculation based on CD&R Information2005 2006 2007 2008 2009 2010
Corporate EBITDA 1.019,0 1.254,8 1.323,7 1.396,1 1.472,3 1.552,6Net Non-Fleet CapEx 0,0 50,7 14,6 15,2 15,9 16,6Delta NWC 14,8 59,0 17,2 18,1 19,1 20,1Delta Others 2,0 7,1 2,1 2,2 2,3 2,4
FCFF 1.006,3 1.152,2 1.293,9 1.364,9 1.439,7 1.518,3
Cost of Equity 7,82% 7,82% 7,82% 7,82% 7,82% 7,82%Discount factor 100% 92,7% 86,0% 79,8% 74,0% 68,6%Discounted FCFF 0 1068,7 1113,1 1089,0 1065,4 1042,1
NPV 5.378
Casestudy: The Hertz Corporation 13.12.2007 22
What are the value drivers?
CD&R already pushed capital structure and leverage to the limit
Significantly lower WACC is very unrealistic
Lower WACC
CD&R included conservative cost cutting projections Still quite some leeway for further improvements Most realistic value driver
Less Costs
Projections already include revenue growth forecast No rational reason for Hertz to outperform the
market Revenue growth above market highly speculative
More Revenues
RAC and equipment rental are businesses with short cash cycles
Thus timing of cash flows is no lever for value
Timing of Cash Flows
Casestudy: The Hertz Corporation 13.12.2007 23
Improving Hertz Operations
HERTZ
US RAC On-airport Operating Expenses
US RAC Off-airport strategy
European OpEx & SG&A
US RAC Fleet Costs
US RAC Non-Fleet CapEx
HERC ROIC
Casestudy: The Hertz Corporation 13.12.2007 24
Further savings potential
1. Further Savings Potential2006 2007 2008 2009 2010
Priced in 243,0 243,0 243,0 243,0 243,0On-Airport OpEx 75,0 75,0 75,0 75,0 75,0Off-Airport 58,0 58,0 58,0 58,0 58,0Europe 33,0 33,0 33,0 33,0 33,0Non-Fleet CapEx 57,0 57,0 57,0 57,0 57,0HERC 20,0 20,0 20,0 20,0 20,0
Projected 411,5 411,5 411,5 411,5 411,5On-Airport OpEx 89,7 89,7 89,7 89,7 89,7Off-Airport 100,0 100,0 100,0 100,0 100,0Europe 100,0 100,0 100,0 100,0 100,0Non-Fleet CapEx 90,0 90,0 90,0 90,0 90,0HERC 31,8 31,8 31,8 31,8 31,8
Mean 327,2 327,2 327,2 327,2 327,2
(Projected-Priced) 168,5 168,5 168,5 168,5 168,5(Projected-Mean) 84,2 84,2 84,2 84,2 84,2
Casestudy: The Hertz Corporation 13.12.2007 25
Modified valuation
By including higher cost savings into the projections, we arrive at a valuation that is $278 mln higher...
Free Cash Flow & NPV Calculation with higher projected savings2005 2006 2007 2008 2009 2010
Corporate EBITDA 1.019,0 1.322,6 1.395,7 1.472,8 1.553,9 1.639,5Net Non-Fleet CapEx 0,0 61,9 14,8 15,4 16,0 16,7Delta NWC 14,8 75,9 18,3 19,3 20,3 21,4Delta Others 2,0 9,1 2,2 2,3 2,4 2,6
FCFF 1.006,3 1.193,8 1.364,9 1.440,4 1.520,0 1.604,0
Cost of Equity 7,82% 7,82% 7,82% 7,82% 7,82% 7,82%Discount factor 100% 92,7% 86,0% 79,8% 74,0% 68,6%Discounted FCFF 0 1107,3 1174,1 1149,3 1124,9 1100,9
NPV 5.656
Casestudy: The Hertz Corporation 13.12.2007 26
Conclusion
We think...
...that a valuation of $5,6 bln can be justified
...CD&R should go ahead with the deal
History proves us right...
Casestudy: The Hertz Corporation 13.12.2007 27
Thank you for your attention!
Any questions?