How to Explain Car Rental to Banks and Investors

Based on 18 years of experience raising money for major car rental companies, investment banker Scott White gives eight good reasons to convince banks their money will be safe, and three compelling arguments to attract equity investors.

As you know, the car rental industry faces biases and misunderstandings. Through hard experience and many hours of talking to skeptical and smart investors, I can attest to the many knee-jerk biases held against car rental. As active business and leisure travelers, most investors have had some negative experience renting a car and have drawn broad judgments about the industry based on random fact patterns. 

My purpose here is to reveal the arguments and explanations I've used successfully with large global banks, leading private equity firms, institutional investors and Wall Street analysts in car rental's biggest mergers and acquisitions and financing deals.

Some versions of the arguments below can be used by local operators with their banks and equity investors. As car rental people, you know all this already. But what follows is the framing of the issues I've found to be effective. With banks, I stress why their money will be safe. With equity investors, I stress why their money will grow.

Addressing the Misunderstandings

I generally start by asking bankers to "set aside what you think you know about car rental and your own personal experiences renting cars." I strive to grab their attention and let them know right away that I'm going to take the offensive, tell them stuff they don't know and refrain from apologizing for the industry. Make no mistake-I say car rental is a great business.

Here are the most common biases and misunderstandings I've encountered and how I've addressed them:

●"FEAR OF EXPOSURE TO 'AUTO.'"

The last 30 years of automaker troubles have made bankers and investors generally want to stay away from anything having to do with "auto." But car rental revenue, first and foremost, is driven by travel levels. And since travel spending has mostly grown steadily for decades, so have car rental revenues.

A related concern has been fear of automaker bankruptcies. For several years, that was an active, though theoretical, discussion. Recently, as you know, it became real. And it played out for car rental just as car rental people said it would; namely, manufacturers honored their repurchase agreements and continued to sell to car rental fleets. Car rental is and remains an important customer for automakers.

Car rental is really a kind of finance business and rental service combined. It has nothing to do with manufacturing, unions or foreign competition. In fact, I "go big" early in the discussion-car rental is an essential service and a key part of the transportation network. It enjoys a "utility-like quality" of predictable and recurring revenues. You can't outsource it to a developing country, nor disintermediate it with the Internet. It is here to stay.

●"EBITDA is huge!"

EBITDA, or earnings before interest, taxes, depreciation and amortization, is what companies use to pay debt service. Unfortunately, you don't get to service non-fleet debt with gross EBITDA. You first have to deduct the costs of the fleet. Vehicle depreciation and interest is "cost of goods sold" for a car rental company. What's left is often called Adjusted EBITDA or Corporate EBITDA. It's the cash flow that can be spent at management's discretion after fleet costs have been paid. Finally, depreciation of the fleet is a cash expense, not a non-cash expense as it is in a business with longer-lived assets, so you don't add it back when determining cash flow.

CONTINUED:  How to Explain Car Rental to Banks and Investors
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Comments

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  5. BUKENYA MOSES YASIN [ February 6, 2016 @ 01:22AM ]

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  6. BUKENYA MOSES YASIN [ February 6, 2016 @ 01:23AM ]

    Gd

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