Industry Realignment: What Now?

Analyzing a Dollar Thrifty Automotive Group merger is not as fun as speculating on college football conference realignment, but the ripples of a merger-or lack thereof-will be felt far and wide in this $21 billion industry. The answers to these burning questions hinge on how the Federal Trade Commission will rule.

● Why hasn't an Avis Budget and Dollar Thrifty deal been announced yet?

Both Avis and Dollar Thrifty are waiting for the FTC's ruling before announcing a deal. Dollar Thrifty agreed to pay Hertz a breakup fee if it signed an agreement to sell to a company other than Hertz in the 12 months after the DTAG shareholder vote. This fee is due upon any new merger, regardless of how the FTC rules, so DTAG and Avis are being prudent to wait and see if the ruling is favorable.

●  When is a deal likely to get done?

If the FTC ruling comes in mid-December or later, then a deal announcement may not come until at least mid-April 2011, analysts say. Many think it could take longer.

●  Is Avis serious about a deal?

Some have said that Avis' primary motivation is not to acquire Dollar Thrifty, but to prevent Hertz from acquiring the smaller discount brands. We're not privy to any ulterior motives, but it is fairly certain that Avis won't drop out of the race before the FTC ruling. The question then becomes, what will Avis do after the ruling?

●  How will the FTC rule?

Avis is going to the FTC with hat in hand asking it to bless a merger between four out of the seven major brands and three competing discount brands. Certainly, something has to give. The FTC won't quash an Avis/DTAG merger altogether; it will more likely ask for a divestiture of assets, or even the sale of a brand, to ease antitrust concerns.

●  Then what?

Hertz said it would divest $325 million in revenue, which would have meant jettisoning Advantage and another $175 million. Avis is prepared to do something similar. Does that mean a complicated detachment of brands in certain markets, or selling a brand?

Separating Dollar from Thrifty won't be easy, as Scott Thompson and company are realizing synergies from back office consolidation. (There's a reason why Dollar and Thrifty's rates are identical at corporate airport locations.) Avis and Budget are less joined at the hip, insiders say. Does this make Budget the expendable brand?

Hertz Chairman Mark Frissora said he'll be "at the front of the line with the checkbook open" for the viable castoffs.

●  What happens if the deal fails?

It's doubtful a new player would emerge. The new company's valuation is based on synergies with another rental company in North America, so don't expect a European RAC or a private equity buyer to swoop in. Enterprise is staying put.

Though Frissora said he's through pursuing DTAG, the new price could be attractive. The FTC was close to vetting the previous deal and Hertz was comfortable with its divestitures. DTAG stockholders would want to get a deal done, because no deal at all would wreak havoc on its stock prices.

If Hertz were to step back in, selling Advantage shouldn't be a problem. Hertz could lure one of those previous "interested parties" back to the table to an Advantage with more locations. "If Avis walks, Hertz will definitely come back," said one analyst.

●  What happens to Advantage?

With Hertz out of the picture, at least for now, Hertz says it intends to grow Advantage to the tune of 85 locations serving airports by the end of 2011.

Frissora said recently that Hertz is looking to move Advantage into the mid-tier value segment to compete with Budget, Dollar and Thrifty. A move up market means Advantage will need a serious rebranding campaign. Can this be done while trying to gain market share in all those new locations? A random check of rates shows Advantage still playing in the Fox, Payless and U-Save pool.

●  How do other players view a merger?

Many DTAG franchisees were actually excited about a Hertz deal (with the notable exception of a franchisee lawsuit against the merger). Hertz has the corporate name and buying power, and isn't their main competition.

However, Dollar and Thrifty do compete directly with Budget, and this has some franchisees worried. How will the new corporate parent treat franchisees where Budget, Dollar and Thrifty go head to head?

The Wall Street view of a merger is that consolidation will lead to tighter fleets and thus higher rates all around. On the ground, the smaller brands are still skeptical of a market-share hungry Advantage that would continue to dilute rates. 

Originally posted on Business Fleet