Some companies search far and wide for a winning acquisition
candidate.
But the folks atAvis Budget Group (
CAR
) found one in their own backyard. In October 2011 , the operator
of the Avis and Budget rental car brands acquired its
independently owned licensee, Avis Europe, which operated Avis
and Budget in Europe, Africa and the Middle East, and just Avis
in Asia.
Avis Budget paid roughly $1 billion for the European licensee.
The buy brought a lot to the table, including revving up the
company's global expansion and accelerating its growth
engine.
"The key to our ability to generate growth through global
expansion obviously stems from our acquisition of Avis Europe
last year," said Avis Budget spokesman John Barrows via email.
"We now control the brand proposition on a global basis, which
provides a number of opportunities."
Barrows says the buy gives Avis Budget the opportunity to
ensure brand "consistency." The idea, he adds, is to create a
more consistent customer experience for each brand, which is
something travelers value higher than almost anything else.
Brand Growth
Another key benefit: With Avis Europe in the mix, the company
has the opportunity to pursue brand growth, such as the Budget
brand in Europe, where the company had a share of the rental car
market of roughly 8 percentage points or more behind other
developed territories where it operates Budget.
"I would say the Avis Europe acquisition was pretty
transformational," adds Northcoast Research analyst John
Healy.
The biggest opportunity, he says, is to expand the Budget
brand across Europe, where he estimates it has a roughly 2% share
of the market. He says Budget is a very strong player everywhere
outside of Europe, with a market share in the double digits in
places such as the U.S. and Latin America.
Every 1% of incremental market share gained by the Budget
brand in Europe could equate to roughly 10 cents to 15 cents in
incremental earnings, Healy estimated in a recent report.
"Although economic head winds in Europe persist, we continue
to believe that initiatives by Avis to expand the Budget brand in
Europe as well as other initiatives will continue to bolster
profits," he added.
The company's initial target is to get Budget to a 5% market
share in Europe, which is still half of what it is in the U.S.,
said Chief Executive Ronald Nelson on the third-quarter
conference call.
"Third-quarter results would suggest the target is reasonable,
as Budget accounted for nearly 13% of our European volume in the
quarter, vs. only 5% a year ago," he said. "As a reminder, each
share point equals roughly $100 million of revenues, and the
opportunity here can be quite large."
Having Avis Europe under the corporate umbrella works to Avis
Budget's advantage in other ways. With Avis Europe in the mix,
Avis Budget is able to be a "single-source provider" for
multinational accounts that want procurement, says Barrows.
And, he adds, Avis Budget can now benefit from the leadership
presence established for Avis in places like India and China.
The company expects to have 100 locations in China by the end
of this year, which Barrows says would be well above the number
of locations there of any other international rental car
company.
The Avis and Budget rental car suppliers serve different
segments of the market. Avis serves the premium commercial and
leisure segments of the travel industry. Budget competes within
value-conscious segments of the industry in the U.S. and other
regions, and as a premium brand in Canada, the Caribbean and
other parts of the world. Budget also operates a truck rental
business in the U.S.
Avis Budget provides a full range of vehicle rental services
through 10,000 rental locations in approximately 175 countries
around the world.
After a tough haul during the recession, its business hit a
trough in 2009 and has been on the comeback trail since with some
nice growth this year. Sales have been up by double digits the
past four quarters. And earnings have risen at that rate the past
two quarters.
Third-quarter earnings rose 43% to $1.46 a share. Sales grew
34% to $2.17 billion.
"Our third-quarter results reflect strong summer volume growth
and a significant contribution from the Avis Europe acquisition,"
said Nelson in a statement reporting results.
The acquisition contributed $526 million to revenue in the
quarter.
In North America, revenue rose 2%, primarily due to a 4%
increase in volume and a 7% increase in ancillary revenues,
partially offset by a 3% year-over-year decline in pricing.
On the international front, revenue, excluding Avis Europe,
grew 1% as a result of a 2% increase in volume and increased
licensee royalty revenue, partially offset by a 3% decline in
reported pricing due primarily to currency effects. Including the
Avis Europe buy, international revenue soared more than 300%.
In Europe, the company saw positive volume growth, driven by
strong leisure demand spurred by the expansion of Budget, said
CFO David Wyshner on the conference call. Corporate demand
continued to be soft, which is probably more reflective of the
economic challenges, he added.
Growth Initiatives
Analysts polled by Thomson Reuters see full-year earnings
rising 47% to $2.42 a share. They expect a 4% increase in
2013.
Avis Budget is reaping the benefits of several initiatives to
drive growth. They include efforts to grow its small-business
customer base, to substantially improve the profitability of its
off-airport business, and to capture a higher proportion of
high-margin cross-border travel, Barrows says. These are among
the company's most profitable segments, says Barrows.
Its strategy also includes new brand marketing campaigns for
both Avis and Budget that were launched in 2012, and an ongoing
focus on increasing sales of ancillary products and services,
such as GPS rentals.
It's also made a push to improve efficiency using tools such
as Six Sigma on more than 500 different project deployments in
2011. Six Sigma is a set of tools and strategies for process
improvement. The projects were primarily focused on enhancing
operational efficiency, driving incremental revenue, reducing
fleet depreciation and fleet maintenance costs, and improving the
Avis and Budget customer experience, Barrows says.