Merger Talks in Holding Pattern

The deal that would join Dollar Thrifty Automotive Group with Hertz Global Holdings fell through on Sept. 30 when DTAG shareholders voted down an acquisition offer of $50.99 a share. A few days later, Avis Budget Group reiterated its intention to acquire Dollar Thrifty based on its previously announced $53.33 offer. Avis said in a statement that the two companies "have agreed to cooperate with respect to Avis Budget's efforts to pursue antitrust clearance of the proposed acquisition."

But a deal won't come this year. In an Oct. 5 statement, Avis said "Dollar Thrifty has requested that Avis Budget not commence an exchange offer at this time, as the parties work cooperatively with the antitrust authorities."

There have been no further public statements from either company on the matter. "Avis Budget and Dollar Thrifty do not intend to make further announcements with respect to this matter unless so required under applicable law," the statement continued.

Hertz could collect some $50 million in breakup fees from Dollar Thrifty if the smaller company agrees to merge with another rental company within 12 months. That probably won't happen before antitrust issues with the Avis bid are resolved, which could take six months or more, according to Wall Street analysts. In this case, an Avis/Dollar Thrifty merger would not be announced until the end of the first quarter of 2011 or even into the summer.

While Avis hasn't given an exchange offer, it is raising the funds to purchase Dollar Thrifty. On Oct. 7, the company priced a $400 million debt offering that it said it will use to help fund the purchase.

Meanwhile, all three public rental companies offered improved or on par earnings guidance in anticipation of third quarter financial results (released after the printing of this magazine).

Hertz Global Holdings Inc.

Hertz reported that the company increased its full year earnings-per-share guidance and said it expects income and revenue improvements for the third quarter, on top of consecutive quarters of income and revenue growth.

 The company reaffirmed its full-year 2010 revenue of $7.5-$7.7 billion and corporate EBITDA guidance of $1.080-$1.095 billion. Hertz upped its full-year forecast of adjusted pre-tax income from prior guidance of $290-$305 million to $315-$325 million.

Mark P. Frissora, the company's chairman and CEO, said, "Despite additional costs to expand our global car rental network, including off-airport and Advantage in the U.S., third quarter results are likely to exceed our internal expectations ..."

Hertz said the increases are attributable to lower fleet costs and a third-quarter sales increase exceeding 11 percent in U.S. car rental, as well as stronger pricing and demand in both the U.S. and Europe car rental businesses.

Frissora expects that "fourth quarter results will reflect continued growth in our car rental businesses led by resilient commercial rental activity offset by typically lower leisure demand and difficult year-over-year comparisons."

Avis Budget Group

Avis Budget estimates that third-quarter revenues will have increased year-over-year to approximately $1.5 billion, while adjusted EBITDA and pretax income will have increased as well.

Avis Budget said the increase in revenue in the domestic car rental segment resulted, as expected, from an increase in rental days offset by a decline in time and mileage revenue per day.

"We expect that our third quarter results will show that vehicle rental demand has begun to strengthen, that our cost-saving initiatives have continued to produce meaningful benefits and that those two trends have had a significant positive effect on our earnings," said Ronald L. Nelson, Avis Budget Group chairman and CEO.

Dollar Thrifty Automotive Group

After the Hertz deal fell through, a major holder of Dollar Thrifty stock, SAC Capital Advisors LP, reduced its stake in DTAG from 8.8 percent to 3.5 percent. Investment watchers called the sale a hedge against a potential merger collapse. Dollar Thrifty's stock has slipped from a high of $52.34 on Sept. 23 to $46.93 on Oct. 28.

On the operations side, DTAG reported that the company now expects adjusted EBITDA, excluding merger-related expenses, to be $240-$260 million for the year, an increase of $40 million from earlier announcements. Adjusted EBITDA for 2009 was $99.4 million.

DTAG reported improved per-month vehicle depreciation estimates of $270-$290 per unit for the third and fourth quarters of 2010 and a full-year range of $230-$240 per unit per month, based on continued strength in residual values and favorable disposition results.

For 2011, fleet costs are expected to be $300-$310 per unit per month, based upon firm used-car demand-though less robust than present conditions-and constrained supply.

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