Avis Budget Group (NYSE:CAR) — A New Stage of Avis-Dollar-Hertz Drama
Avis Budget Group (NYSE:CAR), the New Jersey-based international car and truck rental company, is continuing its three-way mating dance with Dollar Thrifty and Hertz over some possible combination. It appears, so far at least, that Hertz hasn’t quite sweetened the honey pot enough to tempt Dollar Thrifty into a merger.
From his most recent reader update:
“At yesterday’s meeting, Dollar Thrifty shareholders voted to reject Hertz’s bid for the company. Apparently, as reported in the press, many DTG shareholders believe Hertz’s offer substantially undervalues DTG stock. This is laughable. I’d have voted to take the money and run far away from this business, thankful that I’d caught a ride on the great “junk stock” rally of 2009.
“Who knows what these DTG shareholders think of Avis Budget’s (NYSE:CAR) offer, which is only a few dollars per share higher? Perhaps they’ll vote to reject that one, too. Either way, Avis is going to move forward with its offer. It issued a press release announcing its intent to commence a tender offer for DTG shares.
“The consensus view of this M&A drama goes like this: the company that acquires DTG will enjoy a bonanza of earnings driven by synergies and cost cutting. Sure, there will be low-hanging fruit on the cost cutting side. But the consensus view is also ignoring the dangerously boosted leverage of the combined company’s balance sheet. I think the risk of higher financial leverage outweighs the theoretical cost-cutting opportunities.
“If Avis winds up acquiring DTG, I think it’ll be a good development for short sellers. We’d see a more highly levered balance sheet in 2011, right when U.S. GDP flat lines or possibly turns negative. The industry’s fantasy that it can boost rental car pricing in cartel-like fashion presumes that demand will stay constant. Plus, everyone assumes that asset-backed financing for rental fleets will remain tame forever. I’m not so sure about this in an environment of accelerating mortgage defaults and stress at the big banks.
“This drama is not over, and will enter a new stage.”
According to Amoss, DTG shareholders could vote to reject the bid, or antitrust regulators could block a potential CAR and DTG combination. That’s just a basic outline of the situation. To get Amoss’ specific actionable recommendations based on these developments you must sign up for his newsletter, Dan Amoss’Strategic Short Report, which is available through the Agora Financial reports page, found here.
[Nothing in this post should be considered personalized investment advice. Agora Financial employees do not receive any type of compensation from companies covered. Investment decisions should be made in consultation with a financial advisor and only after reviewing relevant financial statements.]