WASHINGTON (AFX) - Hertz's initial public offering plans barely had time to register with investors this summer before rival Vanguard Car Rental Group Inc., the operator of the National Car Rental and Alamo Rent A Car brands, unveiled its own IPO earlier this month.
Vanguard's filing to launch its own public sale came less than three weeks after Hertz Global Holdings Inc.'s filing on July 14. Both companies are expected to debut before the end of this year, and both are being brought to market by the private-equity investors that own them.
Neither rental agency has set the exact pricing terms of their offerings, which are scheduled to debut on the New York Stock Exchange, but Vanguard has registered to raise as much as $300 million, far less than the $1 billion Hertz is aiming for. In both cases, the final size of the deal could differ substantially from the initial registration amount.
Vanguard and Hertz are coming public at a point where the rental car industry faces a major business shift: struggling U.S. automotive makers are no longer interested in supplying cars under the advantageous terms that rental agencies have come to expect.
Under the old fleet car sales system, car manufacturers agreed to sell autos that were eligible for repurchase or guaranteed depreciation programs -- so-called program cars -- to rental agencies. Those program cars made it easier for rental agencies to calculate their depreciation expenses in advance, and to reduce the size of their fleets by returning cars to auto makers sooner than originally expected.
That system is changing as manufacturers focus on higher-profit sales to consumers, reducing their participation in such programs and increasing rental agencies' largest cost: their fleets. Both Hertz and Vanguard warn in their IPO prospectuses that they expect their costs to rise this year.
If these changes stick, car rental agencies will have to adjust by trying to enter fleet purchasing agreements with foreign auto makers, raising prices to consumers, or by altering the way they manage their fleets, says Neil Abrams, president of car rental industry consultants Abrams Consulting Group Inc. in Purchase, N.Y.
'They will have to start to play in the disposal and after-market game by managing their fleets through auctions and by selling to wholesalers and dealerships,' says Abrams, a former Hertz executive who began consulting in 1982. 'When I got in the business, there was no such thing as program cars. They have been around for almost 20 years now, but they didn't exist before then, and rental companies managed their businesses without them. They just need to readjust their business processes again.'
One market characteristic that will help buffer the change is the pricing environment for rental car companies; according to Abrams Travel Data, the research arm of Abrams Consulting, car rental rates have increased about 25 percent over the past 24 months. Many large corporate travel managers are beginning to negotiate new rental car contracts this fall, and the pace of increases that companies like Hertz and Vanguard will be able to put in place should become even clearer then.
Though Hertz and Vanguard will encounter many of the same challenges and advantages of their industry today, the two car companies won't likely be identical in IPO investors' minds. Hertz is clearly the market leader at airport locations in the U.S. and at major European airports, as measured by overall revenue. It also has been expanding in the U.S. off-airport car rental market, long dominated by privately held Enterprise Rent A Car, and now ranks second-largest in that segment in America.
Vanguard, on the other hand, has been losing market share at airport locations. The combined market share of its National and Alamo brands in the top 125 U.S. airports at which it operates declined from 29 percent in 1999 to 20.5 percent in 2005. Vanguard also has almost no presence in the U.S. off-airport rental market, which Abrams sees as a hindrance.
'Hertz, after a number of years of letting Enterprise capture the off-airport business, has made a move into that area. They are still behind Enterprise, but the point is that they are now playing in the off-airport arena,' he says. 'On the other hand, National and Alamo are almost non-existent in the U.S. off-airport market. Long-term, I think that's troubling, because that's where the potential growth is.'
On the other hand, Vanguard's IPO structure may be a little more pleasing to investors than the one proposed by Hertz. Vanguard is using the proceeds to pay down debt, a relatively straightforward transaction. The company's private-equity owner, Cerberus Capital Management, purchased Vanguard out of Chapter 11 bankruptcy in October 2003, and hasn't paid itself any special dividends during that time.
The sole purpose of Hertz's offering is to repay the debt it incurred to pay a special dividend of $999.2 million to its private-equity owners, including Clayton Dubilier & Rice, Carlyle Group, and Merrill Lynch Global Private Equity.
Further complicating matters, the special dividend debt was loaned by Hertz's underwriters, including lead managers Goldman Sachs Group Inc., Lehman Brothers Holdings Inc. and Merrill Lynch & Co.
In addition to receiving a substantial portion of the IPO proceeds through its portion of the loan payback, underwriter Merrill -- whose private-equity subsidiary was one of the three buyers of Hertz -- plans to sell its own shares in the IPO.
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