To:

From:
Date:
RE:

Greg Ledford
Anna (Suan) Lin
May 1, 2014
Bidding for Hertz: Leveraged Buyout

Hertz is a very attractive investment under the current bidding landscape. Our valuation of $14.8
billion earn an estimated return of 27% in five years for partners, offer Ford with a higher
valuation than it would receive from an IPO, and strengthen our position in transportation and
automobile industry. Given our competitive advantages in ABS debt financing, it would be
difficult for the rival bidding group to outbid us.
Valuation
LBO Model
The current valuation is based on an EV/EBITDA of 7.3 times (Appendix 1), a premium multiple
compared to the 6.9x derived from the total value of RAC and HERC segments. Hertz is one of
the top three market leaders in rental car industry with strong yet stable revenue flows. Car rental
is a fairly stable business, especially Hertz has been focused on business customers for decades.
With an industry-standard revenue projection of 6 % CAGR, our partners will earn 25%-30%
IRR. In a base scenario of 4% CAGR revenue growth, the bottom-line is 18% in 2010.
Since Ford has left Hertz as an orphan, we could add great value to Hertz by cost savings. In five
years, we could potentially increase EBITDA margin to 17%, 300 basis points increase. Cost
saving opportunities include:
Reduce direct operating cost & SG & M from 60% to 55%
Stabilize capital expenditure
Optimize international operations to a comparable level of U.S
Overall, Hertz seems a great LBO candidate given its predictable cash flow, cost reduction
potential, good corporate image, and capable management. In addition, Hertzs strong brand
recognition makes it an ideal exit candidate in any coming years, since its already a ready-toIPO corporation. In the next five years, a potential IPO of Hertz could offer our partners up to
37% IRR. On the other hand, Ford wouldnt receive the same high valuation given Hertzs
current low EBITDA margin.
IPO Option
It would not be ideal for Ford to launch an IPO at this point. Hertz currently has a low EBITDA
margin compared to Avis, its largest competitor. As a result, it would be challenging for Ford to
obtain a high IPO valuation given its operation. If Ford chose to file an IPO, the EBITDA
multiple is approximate 6.3x 6.8x, giving Hertz a total valuation of $14 billion (Appendix 3).
It is lower than our current offering of 7.3x EBITDA with $14.8 billion. In addition, it would
take Ford management significant amount of time and resource to prepare for this IPO.
Management at Ford isnt known for dedicating to improving Hertz growth, which makes an IPO
initiated by Ford unattractive.

However, Hertz does have the potential to be a great IPO candidate. The company could
experience a significant EBITDA boost through cost reduction in a fairly short amount of time. If
we assume the same revenue growth in the LBO case, Hertz should be valued around $20 billion
within a year (Appendix 4). Thus, if by any chance that growth projection changes, our firm
could obtain a quick exit though IPO before Hertz faces its bottleneck in growth.
Although a quick IPO exit may raise public suspect of how our firm could add value in such a
short amount of time, an industry-average 8x EBITDA multiple could bring up to 30% IRR
within a year. It may largely depend on the market environment, but we can always keep this
option in mind.
Outbid the rival bidding group
Our arrangement in ABS financing gives us a distinct advantage. The flexibility of ABS
arrangement allowed us to increase or decrease debt with fleet size, which significantly lowers
the risk of this investment. In addition, ABS debt carried a low interest rate for LBO-type
financing (4.5%) (Appendix 5), enables Hertz to save cash on hand for business development.
This feature has been one of our key drivers of LBO model. It is unlikely that our competitor
bidding group would obtain a more competitive debt structure.
On the growth perspective, rental car industry has experienced stable if not declining sales. Hertz
as a business is also in its mature stage. A CPGR revenue growth rate of over 6% would be
considered too aggressive. As a result, banks would likely be reluctant to finance this deal.
Next Step
Our current valuation, 7.3x EBITDA with a total enterprise value of $14.8 billion is a very
reasonable offer. Ford management is not likely to receive any higher bid than this one. In
addition, IPO will not give Ford better payout since they have abandoned the opportunity to
boost Hertzs operations for a long time. Our competitive financing schedule helps us create a
competitive edge against the other bidding group. Most importantly, Hertz is a very good
candidate for our partners, as it could yield over 25% within five years at a very affordable level
of risk.

Appendix:
1. Current Transaction

2. IRR Analysis

3. IPO Valuation
Ford

4. IPO PE Case

5. Debt Schedule