Digging Deeper into the Acquisition War

Today’s announcement that Avis Budget Group is dropping its bid to purchase Dollar Thrifty Automotive Group (DTG) is not surprising. The writing has been on the wall since the announcement of the Avis Europe acquisition. In its conference call announcing second quarter results, Ron Nelson of Avis even alluded to this decision by saying that while the company continues to “actively monitor the Dollar Thrifty situation,” its “focus remains on planning the integration and completing the acquisition of Avis Europe.”

But why now? You can look to Avis’ regulatory filing today for clues. There are two parts to the filing. The first part essentially says that the company is looking for investors to raise money to help finance its purchase of Avis Europe. The second part, the part making all the news, says that Avis Budget has decided not to pursue the DTG deal.

Investors inclined to fund money for the Avis Europe deal want to know the company isn’t going to return to the debt markets any time soon with another hand out to fund a DTG deal. To get those lenders to commit, Avis essentially had to back off.

But what to make of Avis’ claim that it is dropping the bid because of “current market conditions”? Certainly the macro conditions of the auto rental industry are solid, as they are within all three companies involved. It may have to do with the present value of Avis Budget’s stock, which means the cost of its bid has become more expensive — and it was going to have to lean more heavily on equity to compete with Hertz in a bidding contest.

There has been talk that Avis has been in the Dollar Thrifty game simply to keep the price high for Hertz. Those people have been reading too many sports reports on bidding for a free agent between the New York Yankees and Boston Red Sox. I’m not that cynical — there have been some very real and hard costs associated with gaining FTC approval; there has been more than a year of public posturing and backroom deal-making. And it’s simply not smart to drag the government into anything that does not have a chance at happening. However, Avis Budget’s continued involvement kept Hertz honest, though today Avis had to show its hand.

So what’s next? Dollar Thrifty sent a letter to both Hertz and Avis Budget in August stating it will solicit best and final offers in early October. In the meantime, Hertz has extended its exchange offer deadline yet again to Nov. 1.

The deadlines are a bit of political posturing. Both companies will get together in due course to figure this out when they are ready. But you can bet that Hertz shareholders are telling company management to do whatever it takes to get a deal done this time. It should be an interesting season in car rental. But when is it not interesting?

Originally posted on Business Fleet