13.12.

2007

Case Study:
The Hertz Corporation
Presentation: Mariano Mateos, Ricardo Velilla, Elias Völker
 The Bid for Hertz

Casestudy: The Hertz Corporation 13.12.2007 2

 Agenda

Hertz – Company Overview

How to create value

Deal Structure

Financial Engineering

Conclusion

Casestudy: The Hertz Corporation 13.12.2007 3

 Intro

Ford Motor
Company

Hertz
Corporation
Other PE
CD&R
firms

Casestudy: The Hertz Corporation 13.12.2007 4

 Hertz‘ business areas
Off/On-airports Off/On-airports
1,77 million cars 12% share of the
$17 bln market market
RAC revenues $10 bln market
180 largest revenues
airports

Hertz The third largest The fourth

company largest company
$1,2 bln revenue $152 mln
HERC revenue

USA Europe
Region
Casestudy: The Hertz Corporation 13.12.2007 5
 Agenda

Hertz – Company Overview

How to create value

Deal Structure

Financial Engineering

Conclusion

Casestudy: The Hertz Corporation 13.12.2007 6

 Clayton, Dubilier & Rice Inc.

 Private equity investment firm

founded in 1978
 Investments in 39 US and
European businesses
 Specialized in acquiring
under-managed divisions
 Has obtained a higher and
steady return on investment

 The case of Hertz

Casestudy: The Hertz Corporation 13.12.2007 7

 First Stage: Uninteresting Bid
YEAR 2002
 CD&R began studying the
rental car business (RAC).
 Early in its investigation, CD&R
studied Budget and Alamo.
 Hertz  Much more attractive.
 Ford dismissed the proposal as
uninteresting and unfeasible.
 CD&R financing challenge 
Securitizing Hertz‘s rental fleet
in cooperation with Lehman
Brothers and Deutsche Bank
 New proposals.
Casestudy: The Hertz Corporation
YEAR 2003
 CD&R convinced that Hertz‘s
capital structure was inefficient.
 New visit to Ford  The deal
could be indeed financed.
 Hertz was non-strategic to Ford.
 Ford executives remained
unconvinced as well as Hertz‘s
CEO.
13.12.2007 8
 Second Stage: Ford sells

YEAR 2005
 Early 2005  Ford core US auto business was in trouble.
 Monetizing Hertz  One step to improve Ford balance sheet.
 Ford advisors recommended two tracks:
 IPO  Filed in June
 Sale of the business  Proposal and preliminary bids by
July
 Ford  made confidential financing and operating information.
 Hertz executives  Informational meetings with potential buyers.
 After a month of due diligence, CD&R identified several specific
opportunities for improving operations.

Casestudy: The Hertz Corporation 13.12.2007 9

 Improving Hertz Operations

 US RAC On-airport
 US RAC Fleet Costs
Operating Expenses

 US RAC Off-airport  US RAC Non-Fleet

strategy HERTZ CapEx

 European OpEx &

 HERC ROIC
SG&A

Casestudy: The Hertz Corporation 13.12.2007 10

 Agenda

Hertz – Company Overview

How to create value

Deal Structure

Financial Engineering

Conclusion

Casestudy: The Hertz Corporation 13.12.2007 11

 Key Questions of Deal Structure

1. Can fleet be used as a source

of debt capacity?

2. Can ABS financing be used for

a levered buy out?

3. How can lenders be serviced

and protected?

Casestudy: The Hertz Corporation 13.12.2007 12

 Proposed Corporate Structure

The Hertz
Corporation

Domestic Hertz Vehicle Hertz

HERC
Subsidiaries Financing International

OpCo FleetCo

 OpCo owns rest of Hertz‘s assets  Bankruptcy remote special purpose

 Conducts all rental transactions with
customers
 Leases fleet from FleetCo and
provides equity for FleetCo
entities provide optimized
securitization for asset backed debt
financing
 Leasing rates from OpCo cover
debt payments

Casestudy: The Hertz Corporation 13.12.2007 13

 Agenda

Hertz – Company Overview

How to create value

Deal Structure

Financial Engineering

Conclusion

Casestudy: The Hertz Corporation 13.12.2007 14

 Goals of new capital structure

 Hertz should be able to survive a severe business

1 Stability downturn without need to restructure or default

 Capital structure should enable Hertz to make large

2 Flexibility car purchases and manage fluctuations in the rental
activity

 Hertz should be able to exploit future growth

3 Liquidity opportunities without having to refinance

Lower  Funds should be obtained at significantly lower cost

4 Costs than current capital

Casestudy: The Hertz Corporation 13.12.2007 15

 The Layer Cake

OpCo (in m$) FleetCo (in m$)

ABL Facility 396 Cash 526, 4
Term Loan B 1.850 US Fleet ABS 5.256,7
Senior Unsecured Notes 2.250 Internat. Fleet ABS 1.972,4
Senior Sub Notes 800 Total FleetCo Debt 7.229,1
Existing Debt 0 Fleet Enhancement Cars 1.346,9
Total OpCo Debt 5.296,0 Fleet Enhancement LC 200
Sponsor Equity 2295,0 Fleet Enhancement Cash 115,1
Total OpCo Equity 2295,0 Total FleetCo Equity 1662,0

Total Capitalization: 16,482,1 m$

Casestudy: The Hertz Corporation 13.12.2007 16
 Advantages

 New capital structure highly leverages Hertz

 Long term debt agreements ensure stability

 Not all debt was drawn immediately, so

liquidity and flexibility was ensured

 Capital Cost are lowered through extensive

use of asset backed facilities
Casestudy: The Hertz Corporation 13.12.2007 17
 Calculation of Capital Cost

1. FleetCo

Debt
4. Assu
US
Casestudy: The Hertz Corporation
Inte
13.12.2007 18
 Agenda

Hertz – Company Overview

How to create value

Deal Structure

Financial Engineering

Conclusion

Casestudy: The Hertz Corporation 13.12.2007 19

 The Question

 Both PE-groups bid around $5,4 bln for Hertz

 Ford asks for a revised bid

 CD&R are considering whether $5,6 bln are

still a fair price...

Casestudy: The Hertz Corporation 13.12.2007 20

 Original Valuation

 This is what their valuation might have looked

like...

Free Cash Flow

Corporate EBITD
Casestudy: The Hertz Corporation 13.12.2007 21
 What are the value drivers?

 CD&R already pushed capital structure and leverage

Lower
to the limit
WACC  Significantly lower WACC is very unrealistic
 Projections already include revenue growth forecast
More  No rational reason for Hertz to outperform the
Revenues market
 Revenue growth above market highly speculative
 CD&R included conservative cost cutting projections
Less  Still quite some leeway for further improvements
Costs  Most realistic value driver

Timing of  RAC and equipment rental are businesses with short

Cash cash cycles
Flows  Thus timing of cash flows is no lever for value

Casestudy: The Hertz Corporation 13.12.2007 22

 Improving Hertz Operations

 US RAC On-airport
 US RAC Fleet Costs
Operating Expenses

 US RAC Off-airport  US RAC Non-Fleet

strategy HERTZ CapEx

 European OpEx &

 HERC ROIC
SG&A

Casestudy: The Hertz Corporation 13.12.2007 23

 Further savings potential

1. Further Savings

Priced in
Casestudy: The Hertz Corporation 13.12.2007 24
O
 Modified valuation

 By including higher cost savings into the

projections, we arrive at a valuation that is
$278 mln higher...

Free Cash Flow

Casestudy: The Hertz Corporation 13.12.2007 25

 Conclusion

 We think...

 ...that a valuation of $5,6 bln can be justified

 ...CD&R should go ahead with the deal

 History proves us right...

Casestudy: The Hertz Corporation 13.12.2007 26

 Thank you for your
attention!

Any questions?
Casestudy: The Hertz Corporation 13.12.2007 27