Session 3 Part 2 Case the Hertz Corporation

The Hertz Corporation Private Equity Session 3 Source: Case The Hertz Corporation

© 2013 Viney Sawhney

Thisimage cannotcurrently be displayed.

The Hertz Corporation Transaction Structure

© 2013 2013 Viney Sawhney Sawhney

2

The Hertz Corporation Clayton, Dubilier & Rice Inc 

Private equity investment firm founded in 1978



Investments in 39 US and European businesses



Has achieved attractive returns on investments


3

The Hertz Corporation First Stage: Uninteresting Bid Year 2002

Year 2003

• CD&R CD&R commen commenced ced study studying ing the rental car business (RAC) • Early Early in in its its inve investig stigatio ation, n, CD&R evaluated Budget and Alamo. • Hertz Hertz is much better better target target • Ford showed showed no no intere interest st in the the proposal and unfeasible • CD&R CD&R finan financin cing g chall challeng enge e • Putting Putting together together an accep acceptabl table e security structure for lenders using Hertz‘s rental fleet in association with Lehman Brothers and Deutsche Bank

• CD&R CD&R convin convinced ced that Hertz Hertz‘s ‘s capital structure was not attractive • New New vis visit it to Ford Ford - the the dea deall capable of being financed • Hertz Hertz was was non-st non-strate rategic gic to Ford • Ford Ford ex executi ecutive ves s not not impressed as well as Hertz‘s CEO


4

The Hertz Corporation Second Stage: Ford agrees to sell Year 2005

• Earl Early y 2005 2005 • Ford’s Ford’s US auto business business showing showing signs of weakness weakness • In-cashing In-cashing Hertz Hertz investmen investmentt becomes becomes a priority • For strength strengthenin ening g Ford’s Ford’s balanc balance e sheet sheet

• Ford’s Ford’s investment investment bankers suggest two-track approaches: approaches: • IPO filin filings gs compl completed eted in June June • Ford invites invites bids from potential potential privat private e equity investor investors s by July for sale of Hertz

• Ford makes full revelatio revelations ns in regard to financing and operating information for the benefit of investors • Hertz executiv executives es initiate meetings with potential potential buyers buyers to provide additional information • After due due diligence, diligence, CD&R CD&R formulates specific measures / plans to optimize Hertz’s operations © 2013 2013 Viney Sawhney Sawhney

5

The Hertz Corporation Rationalizing and Optimizing Hertz’s Operations Airport operating expenses

Non-airport strategy

Rental fleet costs

Hertz

European OpEx and SG&A

Non-fleet rental CapEx HERC ROI


6

The Hertz Corporation Deal Structure Objectives 

Can the rental fleet be used as a security for raising financing?



Can asset-backed security structure be used to raise funds?



How can fund providers be assured of debt amortization and security?


7

The Hertz Corporation Proposed Corporate Structure

The Hertz Corporati Corporation on Domestic Subsidiaries

HERC

Hertz Vehicle Financing

Hertz International

Operating Company

Fleet Company

• Operat Operating ing Compan Company y own owns s residual Hertz‘s assets • Carrie Carries s out out all all ren rental tal business with customers • Leases Leases fle fleet et from Fleet Fleet Company and provides equity

• SPV entit entities ies provi provide de enhanced securitization for asset backed fund f und raising • Leasin Leasing-r g-rela elated ted cash cash flow flow from Operating Company covers debt amortization amortization


8

The Hertz Corporation Goals of the New Capital Structure • Stab tabilit ility y • Flex lexibil ibilit ity y • Liqu iquidit idity y • Low Lower Cost Costs s


9

The Hertz Corporation


10



11



12

The Hertz Corporation Notes. 1. Adjusted EBITDA (from Operating Projections) reflects the actual cash cost of RAC fleet interest and depreciation charges. Fleet depreciation reflects the maintenance level of capex required to maintain the value of the fleet, without growth. 2. Net Fleet Equity Requirement represents the equity investment by OpCo required to support growth of the RAC Fleet via additional additi onal ABS borrowing. 3. Net OpCo EBITDA is the sum of lines 1 and 2. 4. HERC Net Fleet Growth CapEx represents the increase in HERC’s fleet (on OpCo’s balance sheet rather than FleetCo’s). Note that capital capita l spending to maintain the fleet is already included inclu ded in Adjusted EBITDA. 5. Non-Fleet CapEx reflects anticipated reductions described in the case. 6. Change in Working Capital reflects small small reductions in net working capital over the period, driven by improvements in receivables, payables, and accruals. 7. Change in Other Assets & Liabilities reflects cash flow benefits of the difference between recorded pension expense and required cash contributions, as well as timing differences di fferences between the expensing and payment of insurance insu rance claims. 8. Pre-tax Unlevered Free Cash Flow is the sum of lines 3-7. 9. OpCo Cash Interest reflects a blended cash interest rate between 8% and 9%. 9%. 10. Cash Taxes Taxes include income tax savings due to implementation of a Like-Kind Exchange Program for the RAC fleet. 11. After-tax Levered Free Cash Flow equals the sum of lines 8-10. © 2013 2013 Viney Sawhney Sawhney

13

The Hertz Corporation Capitalized Value Value of Annual Operating Op erating Improvements Improvem ents Source of Value 1 US On-Airport operating expenses 2 US Off-Airport rationalization 3 European expenses

Expected Total 163 100 167

Investment Case Only Exhibits 2A & 2B 75 Case page 6 58 33 Exhibits 3A & 3B

Subtotal Tax @ 36% After tax

430 155 275

166 60 106

4 US Non-Fleet CapEx 5 HERC ROIC improvement TOTAL

90 32 397

56 32 194

Capitalized @ 10 10% with 3% 3% perpetual growth $5,674

$2,775

Capitalized @ 15% with 3% perpetual growth $3,310

$1,619


Case page 7 Case page 7

14

The Hertz Corporation Comparison of After-tax Free Cash Flow to Cash Flow Available Available


15

The Hertz Corporation Sample ECF Valuation Valuation of Hertz Equity E quity at Buy-Out Date Dat e


16

The Hertz Corporation Estimated IRR IRR of LBO Sponsor’s Equity at Buy-Out Date

Notes Figures for the Terminal Terminal Value of Equity do not no t include inclu de dilution from management management (or (o r other) stock options o ptions Including dilution due to stock options opti ons would reduce the value realized realize d by CCM on exit accordingly, the estimated IRR for CCM


17

The Hertz Corporation (B) Sources of Value Creation associated with ABS notes 

Higher debt capacity, capacity, more interest tax shields



Lower cost (compared to next cheapest alternative)



Arbitrage between insurance payments and bond spreads


18

The Hertz Corporation (B) ABS Financing: W hat happened? happened?


19

The Hertz Corporation (B) ABS Financing So … how did they fill the funding hole?

• Transact Transaction ion closed closed December December 21st, 2005 • Several 2005 “Deal “Deal of the Year” Awards Awards © 2013 2013 Viney Sawhney Sawhney

20

The Hertz Corporation (B) Subsequent Events


21

The Hertz Corporation (B) Subsequent Events (continued)


22

The Hertz Corporation Hertz Stock Prices


23

Session 3 Part 2 Case the Hertz Corporation

Recommend Documents