Whenever an industry consolidates, the gap between the large players and the smaller ones tends to get a lot wider.
That's certainly the case in the car rental industry, which has
experienced another major shift in the playing field thanks to a couple
of major deals over the past few months.
One of the deal makers, Hertz Global Holdings (HTZ),
solidified its position as the second-biggest car rental company in the
U.S. with its buyout of Dollar Thrifty Automotive Group for $2.3
billion.
The Dollar Thrifty acquisition made Hertz the No. 1 car rental firm at U.S. airports. This is San Jose, Calif. AP View Enlarged Image
The
deal was announced in late August and closed in November. It is
expected to boost Hertz from No. 3 to No. 1 in car rental market share
at U.S. airports, mainly because Hertz will now compete in the budget
category after making its name in the premium market.
"It's an incredibly positive transaction for Hertz," said Christopher
Agnew, an analyst at MKM Partners. "Hertz previously did not have a
value/leisure brand. Their main competitors, Avis and Enterprise, both
have a mix of leisure and budget brands, and Hertz had been losing
market share. They needed to protect their market share."
Hertz had been pursuing Dollar Thrifty for a couple of years before finally securing a deal both parties could agree on. Avis Budget Group (CAR) had also made overtures to Dollar Thrifty, but dropped its bid in 2011.
The Street Smiles
Wall Street took an immediate liking to the Hertz-Dollar Thrifty
deal, pushing Hertz's stock price up 8% the day it was announced. Shares
have continued to rise since then and hit a five-year high of 18.79
Jan. 28.
"The benefits to Hertz are significantly compelling in the near- and
long-term," Michael Millman, analyst at Millman Research Associates,
noted in a report. "We estimate the acquisition will add roughly 25% to
Hertz's earnings, before synergies (cost or revenue), while helping
protect the Hertz classic brand."
To meet regulatory approval for the deal, Hertz agreed to divest certain assets, including its Advantage Rent A Car business.
Those terms were set because of concerns that three companies —
Hertz, Enterprise Holdings and Avis — will have a stranglehold on the
car rental business now that Dollar Thrifty is out of the mix.
According to reports, those three will now control about 95% of the
U.S. market. The number of players has shrunk considerably the last few
years following a series of mergers.
In 2006, Avis merged with Budget in a $1 billion deal. A year later,
Enterprise Rent-A-Car joined forces with National Car Rental and Alamo
Rent A Car.
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