Hertz Global Holdings Inc agreed to buy smaller rival Dollar Thrifty Automotive Group Inc for about $1.2 billion in a deal that will make it the second-biggest U.S. car rental company.
Shares of Hertz, which also raised its earnings and revenue outlooks for 2010, rose as much as 18 percent to touch a two-year high in morning trade. Shares of chief rival Avis Budget Group also jumped.
The deal marks a significant consolidation for the car rental industry, which is starting to recover from the global economic downturn, helped by a pickup in travel and the used car market.
This is a very important and strategic transaction for us in that it fills a gap in our product portfolio with a strong mid-tier value offering, Hertz Chief Executive Mark Frissora said on a conference call with analysts.
Hertz said the combined company would have an overall U.S. market share of 23 percent. It trails privately held Enterprise Rent A Car which has a market share of 53 percent. Avis Budget has a share of 20 percent.
The Hertz brand will continue to be a commercial high-end travel brand, while Dollar Thrifty and (Hertz's) Advantage brands will continue to be used to penetrate leisure, summer, spring-break vacation travel, analyst John Healy of Northcoast Research said.
The cash-and-stock offer of $41 per share represents a 5.5 percent premium to Dollar Thrifty's Friday close of $38.85.
It values the company at $1.17 billion, based on 28.6 million shares outstanding as of February 24, according to Thomson Reuters data.
Dollar Thrifty shares rose 9 percent to touch a three-year high of $42.60 in morning trade. They currently trade at 16.3 times forward earnings, an 8 percent premium to the company's peers, according to Thomson Reuters StarMine SmartEstimates.
Dollar Thrifty, whose primary market is the United States, rents cars under the Dollar Rent A Car and Thrifty Car Rental brands.
EYEING BUDGET TRAVELER
Hertz CEO Frissora said the deal would increase the company's presence in the non-business segment in international markets including Europe.
The Dollar Thrifty acquisition reveals Hertz's continued resolve to diversify into the mid-tier segment, which was hit less by the downturn.
Hertz, which was previously owned by companies such as Ford, UAL Corp and private-equity firms Clayton and Carlyle Group, has earlier talked about the need to diversify away from its core on-airport rental market to the off-airport market dominated by rival Enterprise.
The combined company would have a market share of about 38 percent at the 190 largest U.S. airports, ahead of Enterprise's 31 percent and Avis's 29 percent.
Last year, Hertz acquired some assets of smaller bankrupt rival Advantage Rent A Car to expand presence in the U.S. leisure rental market.
In the three years ended December 31, 2009, Hertz increased the number of its off-airport rental locations in the United States by about 7 percent to some 1,700 locations.
In a separate statement, Hertz raised its adjusted earnings outlook for 2010 to a range of 43 to 45 cents a share, from 37 to 39 cents a share, indicating an improvement in business trends.
The company also increased its annual revenue outlook to a range of $7.5 billion to $7.7 billion, from $7.4 billion to $7.6 billion.
Hertz said it expects the deal, comprising 80 percent cash and 20 percent stock, to immediately add to its annual adjusted earnings when completed.
At the closing of the deal, Hertz will issue about 18 million shares of its common stock and pay about $750 million in cash, excluding a special $200 million Dollar Thrifty dividend, Hertz said.
Barclays Capital acted as lead financial adviser to Hertz and Bank of America Merrill Lynch also provided advice.
Hertz shares were trading up 18 percent at $15.17 in midday trade on the New York Stock Exchange. Shares of rival Avis Budget were up 13 percent at $16.57.
(Reporting by Bijoy Koyitty and A.Ananthalakshmi in Bangalore; Editing by Mike Miller)