Ford Sheds Hertz Rental Car Busines
DETROIT – Ford Motor Co. is selling its Hertz Corp. rental car business to a group of private equity investors for $5.6 billion.
The deal announced Monday – which includes nearly $10 billion in debt – could be the harbinger of a new public offering for Hertz by owners Clayton Dubilier & Rice, The Carlyle Group and Merrill Lynch Global Private Equity.
Dearborn-based Ford, the nation’s second-biggest automaker, announced in April it was considering shedding Hertz, which it has owned since 1994, to concentrate on its core automotive business. The infusion of cash should help the automaker, which has been struggling with falling sport utility vehicle sales, growing U.S. health care costs and other issues. Ford’s second-quarter profit fell 19 percent to $946 million.
"This transaction reinforces our commitment to strengthening our balance sheet and investing in our core automotive business," said Don Leclair, Ford’s chief financial officer.
The deal is subject to regulatory approvals and is expected to be completed by year’s end.
Some experts on private equity investors have said buyout firms often acquire companies because they think they can make them bigger players in the market. But because Hertz already is the world’s largest general-use car rental agency, the firms involved in this case could try to streamline Hertz’s management and then take the company public, the experts said.
Hertz, they say, is an appealing company for investors because it has a relatively stable cash flow.
Two groups of firms had been competing for Hertz. The other was made up of Bain Capital, The Blackstone Group, Texas Pacific Group and Thomas H. Lee Partners.
Representatives of the winning group said they had no immediate plans to sell any Hertz assets or cut jobs, though they will attempt to improve Hertz’s efficiency.
"The company’s underlying strengths – an exceptional global brand, premium pricing supported by superior customer service and a history of industry innovation – form a strong platform on which to pursue further growth initiatives," said George W. Tamke, an operating partner at Clayton Dubilier & Rice.
Hertz plans a cash tender offer for up to $2.3 billion of outstanding debt securities in connection with the transaction; certain other Hertz debt will be refinanced.
In addition, Ford Motor Credit Co., the automaker’s finance arm, said separately it intends to file a registration statement to exchange its own debt securities for up to $2.4 billion of outstanding Hertz debt with similar terms. Such an exchange could generate cash for Ford Motor Credit.
The transaction also involves another $4.7 billion in primarily other Hertz debt, a Ford spokeswoman said.
Burnham Securities analyst David Healy called the deal "a reasonable move" for Ford, which he said can certainly use the extra cash to enhance new product development and offset rising health care expenses.
"Hertz has become less and less important as an outlet for Ford cars as Ford has pared back sales to Hertz and other daily rental companies," Healy said. "It’s really a noncore business right now."
Still, Hertz is the world’s largest general-use car rental business. It has been a solid contributor to Ford’s bottom line, with revenue of $6.7 billion and net income of $365.5 million in 2004.
The company, founded in 1918, rents vehicles from 7,400 locations in more than 150 countries, according to a recent filing with the Securities and Exchange Commission. In addition, Hertz is a major supplier of rental equipment such as tractors, dump trucks and power washers. Hertz rents equipment from 340 locations in North America, France and Spain.
Hertz controlled 30 percent of the market at the 180 largest U.S. airports in 2004. The company has been trying to expand its off-airport rental business by opening neighborhood locations.
The ties with Ford may not be completely severed. In July, Hertz agreed to continue buying and promoting Ford vehicles through August 2010, in exchange for Ford paying half its advertising costs each year. It wasn’t clear whether that agreement would be kept in place.
Approximately 41 percent of the vehicles Hertz acquired domestically in 2004 were made by Ford and its subsidiaries, according to a recent SEC filing.
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On the Net:
Ford Motor Co.: http://www.ford.com
Hertz Corp.: http://www.hertz.com