Car Rental CEOs Overheat Over Hertz's Dollar Thrifty Offer

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The car rental industry upshifted its drama meter during the past week as chief executives of two of the top three providers during public conference calls took umbrage at comments and developments surrounding Hertz's offer to buy Dollar Thrifty. Hertz's CEO rebuked an equities analyst for suggesting the $1.17 billion offer was too low, Avis Budget's head accused Dollar Thrifty of not considering higher offers and Dollar countered with its own written statement.

Dollar Thrifty Tuesday said it would consider an Avis Budget offer, after a confounded Avis Budget CEO Ronald Nelson said his company had been attempting to explore a deal with Dollar Thrifty but was not granted a meeting to do so, according to a letter sent to Dollar Thrifty CEO Scott Thompson by Nelson. "I was very surprised by your announcement that you had signed a definitive agreement to be acquired by Hertz," Nelson wrote. "A mere week before the Hertz announcement, Scott and I agreed to meet for dinner on April 28 to discuss a transaction between our companies, which you canceled after the Hertz announcement."

On "several occasions in the past," Nelson "expressed interest" in acquiring Dollar Thrifty, but its financial advisor did not "engage [Avis Budget] in any discussions about a transaction or offer to provide [them] with information so that [they] might submit a bid," claimed Nelson. He wrote that Avis Budget would like to make a "substantially higher offer" than Hertz's. Shares in Dollar Thrifty took off.

"It is hard to understand how your failure to engage in discussions with an interested strategic buyer, who you know also would be able to achieve significant synergies as a result of a combination, can be consistent with the fiduciary duties that you and your board carry to seek the best possible deal for your shareholders," Nelson continued.

According to Dollar Thrifty, the company "regrets that Avis Budget in its May 3 letter mischaracterized prior events and interactions between the two companies." Dollar Thrifty believes the "provisions of its merger agreement with Hertz are entirely customary and consistent with applicable law." Nevertheless the company also wrote that its board "is prepared to entertain a 'substantially higher offer' to acquire Dollar Thrifty as proposed by Avis Budget on May 3."

Last week, Citadel Global Equities analyst J.J. Berney asked Hertz CEO Mark Frissora during Hertz's first-quarter call for "the reason for not providing more equity capital" in the deal, saying it seemed "like a complete steal" and also "how much consideration was given to a transaction involving a larger component of stock so that Dollar Thrifty shareholders may participate more fully in value created by this consolidation."

"First of all, that's not true. I totally disagree with you and I'll take it off the call," Frissora responded to Berney's assessment that the agreed price undervalued Dollar Thrifty. "My numbers are absolutely 100 percent correct as well, and I'm not going to go over them with you on the call right now. You can express your views all you want. I'm just saying if you want to discuss the details of the valuation of it, I'd be happy to go offline."

"We own both so we're actually happy today, we'd just rather be happier," responded Berney. To that Frissora quipped, "We'll see what we can do to make you happy, OK?"



"In terms of the value to both shareholders, it's excellent, and the synergies are unique to these two companies, so I feel like we've generated a transaction that will be a win-win for both companies given what the industry is doing now and what the future holds for it," Frissora said. "We can't talk about confidential discussions that we had, but we feel that this was the best financing that we could come up with and yet preserve some value for shareholders at Dollar Thrifty on the upside. We felt that it was a good opportunity for both companies to get together at this time when there's been a lot of value creation on Dollar Thrifty's side ... they are such a good fit in each airport where our weakness is on leisure, which is their strength."

Law firms Kendall Law Group and Tripp Levy PLLC are investigating whether Dollar Thrifty shareholders have had enough say in the process. Tripp Levy claims Dollar Thrifty's board "may not have adequately shopped itself around before entering into this transaction, and Hertz may be underpaying for Dollar Thrifty, thus unlawfully harming Dollar Thrifty shareholders."

Noting the Avis Budget comments, Tripp Levy deemed the arrangement as "grossly unfair" to Dollar Thrifty shareholders.

Avis Budget's Nelson said his company had requested "access to legal, financial and business due diligence information relating to Dollar Thrifty, including access to management, so that we can formulate and submit such an offer. In that regard, we would be prepared to sign an appropriate nondisclosure agreement. We also request that the egregious provisions of the merger agreement be eliminated so that a level playing field can be created. We look forward to the opportunity to engage in productive discussions with the board of directors of Dollar Thrifty to allow its shareholders the opportunity they deserve to realize the full value of their investments in Dollar Thrifty."

High-End Corporate Travel Impact 'Minimal'

If Hertz were to acquire Dollar Thrifty, the impact on big corporate customers could be minimal as Hertz would be filling in its "missing leisure link," according to Dave Kilduff, CWT Solutions Group senior director of ground transportation consulting. "If you look at Dollar Thrifty's business, they have started beefing up their corporate business. But they're never going to take an IBM or an Accenture or something like that. I would speculate that if anything, leisure pricing continues to go up."

Abrams Consulting Group's Neil Abrams suggested Hertz would improve its position among companies seeking a moderately priced product to reduce car rental spend.

"Hertz is a premium, high-end service," said Abrams. "If a company needed or wanted to downgrade for a budgetary or financial tactical purpose and they decided they didn't need all the bells and whistles, then Hertz would have now an alternative to offer them--much like Avis has Budget as its secondary brand for its customers who don't feel like they need the high-end Avis service. It makes them on that level a little more competitive in keeping customers who need to downsize or downgrade in their family."


Dubai Car Rental

In terms of car rental competition and the economic prospects of the key players, though, the deal is important. For the supplier, "corporate pricing pays your fixed costs," explained Kilduff, and "generally those contracts go unchanged for two years." However, "you can raise leisure prices instantaneously."

"Hertz did what companies do to acquire: They negotiate the best deal," said Abrams. "Anything that strengthens Hertz is not seen as a positive development by their biggest competitor, which is obviously Avis Budget."

However, Abrams said Avis Budget's offer to pay "substantially" more for Dollar Thrifty is a "fairly opaque comment." From an investment standpoint, "it's not that [investors] love the rental industry more than other industries," he continued. "It's about how they can get the best return on their investment in a short amount of time. Obviously, they are worried about being short-changed; at least some of them, not all of them."