Investing

Rental Car M&A Crashes on the Interstate (DTG, HTZ, CAR, ZIP, GM)

In late August, Dollar Thrifty Automotive Group Inc. (NYSE: DTG) demanded that its suitors, Hertz Global Holdings, Inc. (NYSE: HTZ) and Avis Budget Group Inc. (NYSE: CAR), make an offer that eliminated any possibility of regulatory risk. Without that, the company said, no deal would get done. Perhaps Dollar Thrifty is the only party surprised that this was an offer that could easily be refused. Now the company says it will move forward by itself. That’s sure to leave some unhappy shareholders.

In May, Hertz made an offer to acquire Dollar Thrifty for about $2.24 billion, substantially above Avis’s earlier offer of around $1.6 billion which was higher than Hertz’s original offer of $1.2 billion. That first offer came in the Spring of 2010, at about $50/share, a premium of about 18% above Dollar Thrifty’s then-current share price. Then Avis came in with an unsolicited counter-offer of $53/share. That was a good price until this past Spring when Hertz upped the ante to around $72/share.

Investors had pretty much lost interest in the whole soap opera by mid-June, and by early August Dollar Thrifty’s shares had fallen from a high of about $84 back to around $60, right around the $59/share mark the shares are trading at today. It was abundantly clear in August that neither Hertz nor Avis would be able to eliminate the regulatory risk.

Dollar Thrifty cushioned investors’ hopes this morning by announcing that it would proceed with its $400 million stock re-purchase program, at the rate of about $100 million/quarter in each of the next four quarters.

Dollar Thrifty also affirmed revenue and earnings guidance for the third quarter and revenue guidance for the full year. The company thinks that its low-end rentals and its brand strength will continue to serve shareholders well.

The latest wrinkle in the car rental business is the emergence of short-term, low cost rentals from companies like Zipcar, Inc. (NASDAQ: ZIP). Zipcar isn’t the biggest threat here, though, as Hertz has already unveiled a similar program and now General Motors Co. (NYSE: GM) also has plans to enter the field.

That’s where Dollar Thrifty’s competition is going to come from, and there’s not indication that the company is ready to meet it. Perhaps management has been distracted by the furor created with the takeover talks, or perhaps they just think the short-term thing is no big deal.

For its part, Hertz has apparently not given up on the deal. The company said that it continues to get regulatory approval for the merger. Some things in life are difficult to imagine, and this could be one of them.

Before the merger madness, Dollar Thrifty shares were trading around $40-$45. Virtually every dollar above that level was added in the expectation of a deal that didn’t get done. About the only thing keeping the price from dropping like a rock is Hertz’s statement that it hasn’t given up on the deal.

Is the fair price for Dollar Thifty around $72/share, $59/share, or $45/share? We’re about to find out.

Paul Ausick