Is Hertz close to driving away with Dollar Thrifty?

Fri May 25, 2012 12:33pm EDT

May 25 (Reuters) - Car rental company Hertz Global Holdings Inc is nearing its long-cherished goal of buying out rival Dollar Thrifty, after doggedly pursuing its quarry through a bidding war with rival Avis Budget for several years.

A friendly deal could be announced anytime now, according to several investors.

Hertz said earlier this month that it was close to getting antitrust approval - seen as the biggest hurdle to a transaction - having identified a buyer for the assets it needs to divest.

"We believe that Hertz will be motivated to follow through and negotiate a transaction," said Roy Behren, co-chief investment officer at Westchester Capital Management - Dollar Thrifty Automotive Group Inc's second-biggest shareholder.

He said Hertz's offer would likely be in the high 80s to low 90s range. At $85 per share, the deal would value Dollar Thrifty at $2.38 billion.

Dollar Thrifty is seen as the last big prize in an industry that has consolidated in recent years. But antitrust concerns have clouded the battle for its takeover as it would leave just three players dominating more than 90 percent of the U.S. car rental market.

The market leader is privately held Enterprise Holdings.

"This story has been there for a real long time and it is starting to suffer from deal fatigue," said Craig Effron, managing partner at Scoggin Capital Management. Scoggin holds shares of Hertz and Dollar Thrifty.

"Both the parties know what the deal price is going to be at this point. They are just waiting for the FTC to make their decision," he said.

Hertz has worked with the U.S. Federal Trade Commission (FTC) to get antitrust approval for almost a year. It has agreed to divest its budget brand Advantage, which caters to the same market as Dollar Thrifty.

Analysts and shareholders consider U-Save Car & Truck Rental, owned by Franchise Services of North America Inc , as a potential buyer for Hertz's budget brand Advantage.

HOW HIGH CAN THE PRICE GO?

Hertz and Avis have made several offers for Dollar Thrifty in the last five years. At one point during the financial crisis, Hertz offered to buy the smaller rival for $2 per share.

When Dollar Thrifty halted the sale process in October 2011, Hertz's offer was valued at $66.21 per share.

Dollar Thrifty's stock has since gone up about 30 percent. It was trading at $76.76 on Friday.

"We and most other shareholders will not agree to any transaction that has a 7 in front of it. Low 80s would not do the trick either," Westchester Capital's Behren said.

Another Dollar Thrifty shareholder, who did not want to be named, said he would happy with mid-80s. And though Hertz could pay as much as $90 per share, but it did not need to.

An $85 per share offer would only be slightly above the stock's year-high of $84.24.

Fred Lowrance, an analyst with Avondale Partners, said Hertz will not go above $90 per share unless it absolutely has to. But given Dollar Thrifty's earnings potential, a $95 per share deal would still make sense for Hertz, he said.

Dollar Thrifty's net income was $159.6 million in 2011 on revenue of $1.55 billion. Hertz recorded revenue of $8.3 billion in the same year.

AVIS THREAT

Hertz has to make a move fast. If it delays the offer till next year, Avis could come back into the race, said Avondale analyst Lowrance.

Hertz buying Dollar Thrifty will widen the gap between Avis and Hertz. Avis recorded revenue of $5.9 billion in 2011.

Many have ruled Avis out since it announced plans to buy its European arm for about $1 billion. It pulled out of the Dollar Thrifty race citing tough debt market conditions.

"I wouldn't totally count Avis out. They would be very much behind the (antitrust) process. To catch up, they need to do that in the price that they propose," said the Dollar Thrifty shareholder who did not want to be named.

Many Dollar Thrifty shareholders are now arbitrage funds - those who specialize in investing in companies that could get acquired. They could pull out if a deal is not done.

If a deal does not happen, the stock will settle in the 60s, Avondale's Lowrance said.

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