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 (
), 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 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
"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
Hertz had been pursuing Dollar Thrifty for a couple of years
before finally securing a deal both parties could agree on.Avis
Budget Group (
) had also made overtures to Dollar Thrifty, but dropped its bid
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
To meet regulatory approval for the deal, Hertz agreed to
divest certain assets, including its Advantage Rent A Car
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.
While these and other deals have whittled down the playing
field, not everyone sees rapid consolidation as a bad thing.
"Consolidation is a positive for the industry because it will
allow for more rational competition moving forward," Agnew said.
"The industry will still be competitive, and the impact on
consumers should be minimal."
According to its website, privately held Enterprise Holdings
has annual revenue of $15.4 billion, almost 1.3 million cars and
trucks, and more than 6,000 neighborhood and airport branch
offices in the U.S.
Hertz is expected to report about $9 billion in revenue for
2012. It operates from 10,400 locations in about 150 countries
worldwide. When it was acquired by Hertz, Dollar Thrifty boasted
118,000 vehicles at 445 U.S. locations and generated $1.6 billion
in yearly revenue.
Hertz also operates one of the world's biggest equipment
rental businesses, Hertz Equipment Rental, through 340 branches
in the U.S., Canada, China, France, Spain and Saudi Arabia, as
well as through international licensees.
Avis has about 10,000 rental locations in 175 countries. It is
expected to log $7.3 billion in 2012 revenue.
Like Hertz, Avis has been busy on the acquisition front. In
early January, it announced plans to buyZipcar (
) for $491.2 million. Zipcar operates a car-sharing network in 17
cities and more than 250 college campuses in the U.S., Canada and
With car sharing, members rent a vehicle for an hour or two
for short trips. Zipcar has more than 760,000 members. Its
business is estimated to be at least five times larger than the
car-sharing businesses of both Hertz and Enterprise.
Agnew expects to see further consolidation in the industry in
coming quarters and years, with much of it taking place
"I would suspect that companies will continue to make top-end
acquisitions globally," he said. "The growth for Hertz will be
where the economic growth is taking place, so I expect it will
look to do deals in China, which may include acquisitions or
Hertz gets 35% of its sales from international markets. That
percentage has ticked higher in recent years.
Financially, Hertz continues to bounce back from a slowdown in
business that began in 2008 with the financial crisis. Although
the company's top-line growth has been sluggish, it has produced
strong earnings growth amid efforts to improve its operating
"They have managed fleet costs much more efficiently and
flexibly," Agnew said.
Hertz earned 63 cents a share during its 2012 third quarter.
That was up from 51 cents the prior year and 2 cents above Wall
Overall revenue gained 3% to $2.51 billion, slightly below
estimates for $2.59 billion. Top-line growth has decelerated the
past three quarters.
Global car rental revenue climbed 2% to $2.15 billion during
the quarter, while worldwide equipment rental revenue gained 13%
to $363 million.
Analysts polled by Thomson Reuters expect Hertz's Q4 earnings
to come in at 31 cents a share, a gain of 29% from a year