Last week’s blog examined how Hertz’s bankruptcy and its need to sell off fleet could impact the used car market. This week we’ll turn to issues surrounding the company’s U.S. franchisees of the Hertz, Dollar, and Thrifty brands.
Franchise Contracts in Question
Car rental licensees have varying contracts. The licensees that opened territories for the majors — going back as far as the 1950’s — have more favorable terms.
Car rental corporates have bought back those territories opportunistically over the years and have sometimes used bankruptcy to force renegotiation of those contracts. Certainly, this is not uncommon in other franchisor/franchisee relationships in other industries.
As a result of the 2001 bankruptcy of ANC Corporation (owners of National and Alamo), some National franchisees were forced to take the Alamo brand and combine counters at airports. As well, some National franchisees that operated in multiple cities were reduced to one city with both brands in a “trade.”
When Budget filed for bankruptcy in 2002, the purchaser, Cendant, decided not to contest the contracts, which created a smoother runway for deal acceptance. The deal did, however, create an environment where the franchisee and franchisor competed against each other in the same city.
Though the franchise landscape has shrunk steadily in the past 30 years, a footprint of Hertz, Dollar, and Thrifty franchisees still control some major territories. They’re well respected, well-known in their communities, and have the legal and political wherewithal to use as leverage in any negotiations.
They also have their states’ franchise laws on their side.
This bankruptcy comes during one of the most disruptive forces ever to beset our economy. With the hindsight of those previous bankruptcies, and under the eye of a bankruptcy judge or trustee, there will be plenty of scrutiny in the bargaining.
Of course, the new owner of Hertz will dictate much of how this will play out.
Fleet Payments in Limbo?
All franchisees buy a certain portion of their fleets themselves, particularly the major ones. However, a percentage of their fleet comes from corporate agreements Hertz makes on their behalf for automakers’ repurchase programs and outright sales (“risk”).
The payments flow from the franchisees through Hertz to the automakers and back to the franchisees upon sale of those units, which also includes incentive monies from the manufacturers. These payments could stop under the automatic stay in a bankruptcy, which could hold up payment of millions of dollars for larger franchisees.
That said, like the contract machinations, these payments will be closely scrutinized by the bankruptcy judge and should not stay in limbo to the extent of the unsecured debt will be.
Hertz corporate’s cost of borrowing will likely go up because of the bankruptcy, in addition to the downturn in economic conditions caused by this pandemic. The single largest fleet funding instrument for the majors — ABS (asset-backed securities) — may not be the path it once was.
Would Hertz corporate’s rising cost of borrowing affect how much its franchisees pay for fleet? In these unprecedented times, the automakers — who have felt the pandemic pain in equal measure — will be likely to make deals with both Hertz corporate and its franchisees.
Corporate Accounts in Jeopardy
About 38% of Hertz’s U.S. revenues (according to its 2019 10-K filing) comes from commercial business, with the majority flowing through national corporate accounts. The franchisees globally benefit from the business.
Hertz’s corporate customers won’t be able to use the bankruptcy to break those contracts, but once they’re up for renewal, they’ll have leverage in the renegotiations and listen to Hertz’s competitors.
Will this faucet flow turn to a trickle next year? Or will customers, weakened too by the pandemic, willingly negotiate with the new Hertz and its competitors as they always have?
Envisioning Hertz 2.0
What does the next iteration of Hertz look like? Today there are more questions than answers — at least by raising the questions, we’ll know where the action will be.
Donlen will likely be sold to pay creditors, leaving only car rental as the purchase target. Remember that HERC, its equipment rentals business, was spun off several years ago. Could Hertz Local Edition, which controls the State Farm business, be spun off too? Could other regions of the world be spun off, similar to the way Avis Europe plc was a separate company prior to 2012?
Can Hertz possibly remain a standalone company exiting bankruptcy? Hertz has $1 billion cash on hand to fund continuing operations but will likely need to raise additional cash via a Debtor-in-Possession (DIP) loan. The existing creditors wouldn’t be satisfied with how much the stock will be worth at that point.
Who then will buy Hertz?
Anti-trust issues will stand in the way of Enterprise or Avis. Remember the FTC’s machinations and horse trading to allow the Hertz acquisition of Dollar Thrifty in 2012? A combined Hertz, Dollar, and Thrifty with either Avis and Budget or Enterprise, National, and Alamo on any airport doesn’t pass the FTC’s smell test.
Could Sixt, who has walked to the altar before with other car rental companies, only to back away without the ring? Perhaps. The most likely scenario is private equity. A century-old household name without the debt sitting on major airports willing to renegotiate contracts sounds pretty enticing.
Dumping all his stock at a loss of nearly $2 billion, is it safe to say Carl Icahn won’t?
Could Hertz 2.0 look to a more asset-light (and more profitable) future by operating the top airports and refranchising the rest domestically and internationally? Could Hertz Local Edition and the airport business be separated?
No, the brand isn’t going away. It’s also unlikely Dollar and Thrifty will get spun off. But the fleet will be a lot smaller, which should benefit car rental across the board.
In any event, Hertz 2.0 will look very different. Will other major car rental companies like the new structure and create their version of car rental 2.0?