Case Study Hertz Corporation

13.12.
2007
Case Study:
The Hertz Corporation
Presentation: Mariano Mateos, Ricardo Velilla, Elias Vlker
The Bid for Hertz
Casestudy: The Hertz Corporation
13.12.2007
Agenda
Hertz
Hertz Company
Company Overview
Overview
How
How to
to create
create value
value
Deal
Deal Structure
Structure
Financial
Financial Engineering
Engineering
Conclusion
Conclusion
13.12.2007
Intro
Ford Motor
Company
Hertz
Corporation
CD&R
Other PE
firms
13.12.2007
Hertz business areas

Off/On-airports
1,77 million cars
RAC
Hertz
HERC
$17 bln market

revenues
180 largest
airports
Off/On-airports
12% share of the
market
$10 bln market
revenues
The third largest

company
$1,2 bln revenue
The fourth
largest company
$152 mln
revenue
USA
Europe
Region
13.12.2007
Agenda
Hertz
Hertz Company
Company Overview
Overview
How
How to
to create
create value
value
Deal
Deal Structure
Structure
Financial
Engineering
Conclusion
Conclusion
13.12.2007
Clayton, Dubilier & Rice Inc.

Private equity investment firm
founded in 1978
Investments in 39 US and
European businesses
Specialized in acquiring
under-managed divisions
Has obtained a higher and
steady return on investment
The case of Hertz
13.12.2007
First Stage: Uninteresting Bid

YEAR 2002
YEAR 2003
CD&R began studying the

rental car business (RAC).
Early in its investigation, CD&R
studied Budget and Alamo.
Hertz Much more attractive.
Ford dismissed the proposal as
uninteresting and unfeasible.
CD&R financing challenge
Securitizing Hertzs rental fleet
in cooperation with Lehman
Brothers and Deutsche Bank
New proposals.
CD&R convinced that Hertzs

capital structure was inefficient.
New visit to Ford The deal
could be indeed financed.
Hertz was non-strategic to Ford.
Ford executives remained
unconvinced as well as Hertzs
CEO.
13.12.2007
Second Stage: Ford sells

YEAR 2005
Early 2005 Ford core US auto business was in trouble.
Monetizing Hertz One step to improve Ford balance sheet.
Ford advisors recommended two tracks:
IPO Filed in June
Sale of the business Proposal and preliminary bids by
July
Ford made confidential financing and operating information.

Hertz executives Informational meetings with potential buyers.
After a month of due diligence, CD&R identified several specific
opportunities for improving operations.
13.12.2007
Improving Hertz Operations
US RAC On-airport
Operating Expenses
US RAC Fleet Costs
US RAC Off-airport
strategy
US RAC Non-Fleet
CapEx
HERTZ
European OpEx &

SG&A
HERC ROIC
13.12.2007
10
Agenda
Hertz
Hertz Company
Company Overview
Overview
How
How to
to create
create value
value
Deal
Deal Structure
Structure
Financial
Engineering
Conclusion
Conclusion
13.12.2007
11
Key Questions of Deal Structure

1.
1. Can
Can fleet
fleet be
be used
used as
as aa source
source
of
of debt
debt capacity?
capacity?
2.
2. Can
Can ABS
ABS financing
financing be
be used
used for
for
aa levered
levered buy
buy out?
out?
3.
3. How
How can
can lenders
lenders be
be serviced
serviced
and
and protected?
protected?
13.12.2007
12
Proposed Corporate Structure

The Hertz
Corporation
Domestic
Subsidiaries
HERC
Hertz Vehicle
Financing
Hertz
International
OpCo
FleetCo
OpCo owns rest of Hertzs assets

Conducts all rental transactions with
customers
Leases fleet from FleetCo and
provides equity for FleetCo
Bankruptcy remote special purpose

entities provide optimized
securitization for asset backed debt
financing
Leasing rates from OpCo cover
debt payments
13.12.2007
13
Agenda
Hertz
Hertz Company
Company Overview
Overview
How
How to
to create
create value
value
Deal
Deal Structure
Structure
Financial
Engineering
Conclusion
Conclusion
13.12.2007
14
Goals of new capital structure
Stability
Hertz should be able to survive a severe business

downturn without need to restructure or default
Flexibility
Capital structure should enable Hertz to make large

car purchases and manage fluctuations in the rental
activity
Liquidity
Hertz should be able to exploit future growth

opportunities without having to refinance
Lower
Costs
Funds should be obtained at significantly lower cost

than current capital
13.12.2007
15
The Layer Cake

OpCo (in m$)
ABL Facility
FleetCo (in m$)

396
Cash
526, 4
Term Loan B
1.850
US Fleet ABS
5.256,7
Senior Unsecured Notes
2.250
Internat. Fleet ABS
1.972,4
800
Total FleetCo Debt
7.229,1
Fleet Enhancement Cars
1.346,9
Senior Sub Notes

Existing Debt
Total OpCo Debt
5.296,0
Fleet Enhancement LC
Sponsor Equity
2295,0
Fleet Enhancement Cash
Total OpCo Equity
2295,0
Total FleetCo Equity
200
115,1
1662,0
Total Capitalization: 16,482,1 m$

13.12.2007
16
Advantages
New capital structure highly leverages Hertz
Long term debt agreements ensure stability
Not all debt was drawn immediately, so
liquidity and flexibility was ensured
Capital Cost are lowered through extensive
use of asset backed facilities
13.12.2007
17
Calculation of Capital Cost
13.12.2007
18
Agenda
Hertz
Hertz Company
Company Overview
Overview
How
How to
to create
create value
value
Deal
Deal Structure
Structure
Financial
Engineering
Conclusion
Conclusion
13.12.2007
19
The Question
Both PE-groups bid around $5,4 bln for Hertz

Ford asks for a revised bid
CD&R are considering whether $5,6 bln are
still a fair price...
13.12.2007
20
Original Valuation
This is what their valuation might have looked
like...
13.12.2007
21
What are the value drivers?

Lower
WACC
More
Revenues
Less
Costs
CD&R already pushed capital structure and leverage

to the limit
Significantly lower WACC is very unrealistic
Projections already include revenue growth forecast
No rational reason for Hertz to outperform the
market
Revenue growth above market highly speculative
CD&R included conservative cost cutting projections
Still quite some leeway for further improvements
Most realistic value driver
Timing of RAC and equipment rental are businesses with short

cash cycles
Cash
Thus timing of cash flows is no lever for value
Flows
13.12.2007
22
Improving Hertz Operations
US RAC On-airport
Operating Expenses
US RAC Fleet Costs
US RAC Off-airport
strategy
US RAC Non-Fleet
CapEx
HERTZ
European OpEx &

SG&A
HERC ROIC
13.12.2007
23
Further savings potential
13.12.2007
24
Modified valuation
By including higher cost savings into the
projections, we arrive at a valuation that is
$278 mln higher...
13.12.2007
25
Conclusion
We think...
...that a valuation of $5,6 bln can be justified
...CD&R should go ahead with the deal
History proves us right...

13.12.2007
26
Thank you for your

attention!
Any questions?
13.12.2007
27

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13.12.

The Bid for Hertz

Casestudy: The Hertz Corporation

Casestudy: The Hertz Corporation

Hertz business areas

$17 bln market

The third largest

Clayton, Dubilier & Rice Inc.

First Stage: Uninteresting Bid

CD&R began studying the

CD&R convinced that Hertzs

Casestudy: The Hertz Corporation

Second Stage: Ford sells

Ford made confidential financing and operating information.

Improving Hertz Operations

US RAC Fleet Costs

European OpEx &

Casestudy: The Hertz Corporation

Key Questions of Deal Structure

Proposed Corporate Structure

OpCo owns rest of Hertzs assets

Bankruptcy remote special purpose

Casestudy: The Hertz Corporation

Goals of new capital structure

Hertz should be able to survive a severe business

Capital structure should enable Hertz to make large

Hertz should be able to exploit future growth

Funds should be obtained at significantly lower cost

Casestudy: The Hertz Corporation

The Layer Cake

FleetCo (in m$)

Senior Unsecured Notes

Internat. Fleet ABS

Total FleetCo Debt

Fleet Enhancement Cars

Senior Sub Notes

Total OpCo Debt

Fleet Enhancement Cash

Total OpCo Equity

Total FleetCo Equity

Total Capitalization: 16,482,1 m$

Calculation of Capital Cost

Casestudy: The Hertz Corporation

Both PE-groups bid around $5,4 bln for Hertz

Casestudy: The Hertz Corporation

Casestudy: The Hertz Corporation

What are the value drivers?

CD&R already pushed capital structure and leverage

Timing of RAC and equipment rental are businesses with short

Improving Hertz Operations

US RAC Fleet Costs

European OpEx &

Casestudy: The Hertz Corporation

Further savings potential

Casestudy: The Hertz Corporation

Casestudy: The Hertz Corporation

History proves us right...

Thank you for your

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