Hertz Lbo free essay sample

1. How much value do you expect to be created by operating improvements and capital structure changes envisioned by CDR? CDR proposed changes to the following areas. a. US RAC on-airport operating expenses: Labor per transaction, administrative and other costs had increased 41%, 65% and 30% respectively between 2000 and 2005. In addition, margins were not constant across locations and varied from 32% to -7%. CDR proposed that the operating expenses could be reduced resulting in cost savings of $75M per year. b. US RAC off-airport strategy: Hertz’s plan for expansion in off-airport locations had not generated the profit commensurate with the capital required to support it. Further, profit margins varied from 55% to -200% across off-airport locations. CDR proposed that potential savings of $58M per year could be realized from this source. c. European operating and SGA: Hertz’s European SGA expenses as a percent of revenue were nearly three times higher than those in the US. We will write a custom essay sample on Hertz Lbo or any similar topic specifically for you Do Not WasteYour Time HIRE WRITER Only 13.90 / page CDR proposed that efficiencies from this source would be $33M per year. d. US RAC fleet costs: Hertz had higher fleet costs as compared to its competition. However, this advantage that the competition held over Hertz was expected to go away soon, which would result in a more level playing field. e. US RAC Nonfleet capital expenditures: Hertz spent more on capital expenses than its competitors. Reducing this to comparable levels with Avis would result in savings of $57M per year. f. HERC ROIC: Aligning manager’s incentives to focus on ROIC was expected to result in significant savings, to the order of $32M per year. In total, CDR was expecting to create approximately $255M per year. Conservatively, we would expect that CDR would realize 50% of its projections, which amounts to approximately $127M per year. 2. How would you explain the proposed transaction structure developed by CDR and its partners? Specifically, does it help or hinder the realization of the anticipated sources of value in the deal? The transaction structure can be summarized as follows: a. Created a new special purpose entity – Fleetco – that would buy vehicles from OEMs and dealers and would finance the purchases through ABS and equity from Hertz, the parent company. b. Fleetco’s ABS were secured by the fleet nd repurchase agreements with car manufacturers. c. Fleetco would lease the vehicles to Hertz, the parent company. Fleetco’s assets thus consisted of the rental cars and the cash contributed by the parent. The lease payments from the parent would pay the interest payments on the ABS debt. d. The parent company maintained control of HERC and rented out equipment and serviced them. At first glance, the transaction structure described above does not seem to have any impact on the operating efficiencies that were generated through the deal and seems more to affect the financing aspect of the deal. The transaction structure was designed to maximize the funding obtainable through the RAC fleet and to tap the ABS market. However, digging a little deeper, we can see that CDR wanted to achieve the following with this structure: a. Stability in the business without having to restructure due to downturns. b. Allow for volume purchases that would mitigate seasonal and cyclic fluctuations in car rental activity. c. They also wanted to obtain sufficient liquidity to enable opportunities for future growth and expansion without refinancing. . Finally, lower the cost of capital than what was currently available under Hertz’s existing structure. The value expected to be derived from operating efficiencies were dependant on CDR’s ability to make decisions without worrying about putting out short term fires and independence from the parent with regards to business decisions. The vision was broader, and depended on complete flexibility and autonomy, which they were able to obtain from this structure. With this structure and the resulting ability to take business decisions without having to get buy-in from the parent company, CDR could reduce the labor costs without fearing a backlash from the employees in the RAC on-airport segment, close the RAC off-airport locations which were not generating sufficient profits, and align manager’s incentives to focus on key metrics such as ROIC. 3. Compare your anticipated sources of value to the illustrative projections contained in the Hertz selected projections online. The anticipated sources of value are the following: . US On-Airport segment – margin increase through productivity gains that more than offset cost inflation b. Off Airport segment – market share to increase due to further penetration of replacement segment. c. European and international RAC: steady volume growth, and cost savings and margin enhancements expected from narrowing of the gap between US and non-US performance comparable cost categories. d. HER C: EBITDA margin improvements resulting from capital efficiency and SGA leverage. From the projections we see the following: 200520062007200820092010 RAC Gross EBITDA ($, M)$2,201$2,436$2,616$2,868$3,097$3,305 Change 10. 68 %7. 39 %9. 63 %7. 98 %6. 72 % RAC Adjusted EBITDA$469$491$554$623$708$809 Change4. 69 %12. 83 %12. 45 %13. 64 %14. 27 % As we can see from the table above, RAC Gross EBITDA is increasing every year about 8%. The RAC adjusted EBITDA is increasing at about 12. 5% every year on average. The RAC Adjusted EBITDA which is the Gross EBITDA minus financing and depreciation charges is growing at a much higher pace. We can attribute these increases to value generated from operating efficiency improvements. 4. How much should CCM bid on sep 5? Assumptions 20. 84% Corporate Debt5296 Fill in the ? s, attach to write-up Revenues2005 PF20062007200820092010 RAC (rent-a-car)600164276783699374487720 HERC137413611669164217871725 Corporate717171717171 Total744678598523870693069516 Gross EBITDA RAC220124362616286830973305 HERC558613660725752788 Corporate Expenses(7)(7)(7)(7)(7)(7) Total Gross EBITDA275230423269358638424086 Corporate EBITDA RAC Gross EBITDA220124362616286830973305 less: RAC Cash Depreciation Interest (lease pmt)(1732)(1945)(2062)(2245)(2389)(2496) RAC Adjusted EBITDA469491554623708809 HERC EBITDA558613660725752789 Corporate Expenses(7)(7)(7)(7)(7)(7) Corporate EBITDA102010971207134114531591 Free Cash Flow to Equity (FCFe) 20062007200820092010 Corporate EBITDA 1,097. 0 1,207. 0 1,341. 0 1,453. 0 1,591. 0 less: increase in RAC equity (20. 84% x ? fleet) 99. 4 91. 5 92. 9 77. 5 116. 7 less: HERC maintenance CAPX (cash deprn) (230. 0)(287. 0)(292. 0)(303. 0)(322. 0) less: HERC growth CAPX (HERC ? below) 76. 0 78. 0 70. 0 72. 0 65. 0 less: corporate CAPX (256. 0)(221. 0)(217. 0)(209. 0)(217. 0) plus: decrease in work cap 29. 9 27. 1 24. 9. 7 7. 1 plus: increase in other liabs (pension insurance) 58. 9 66. 4 36. 0 48. 8 69. 4 less: corporate cash interest, net (461. 0)(456. 0)(445. 0)(424. 0)(390. 0) less: corporate cash taxes (30. 0)(33. 0)(37. 0)(40. 0)(43. 0) equals: Available to Pay Principal 384. 2 473. 0 573. 0 685. 0 877. 2 less: principal payments (384. 2)(473. 0)(573. 0)(685. 0)(877. 2) Free Cash Flow to Equity 0. 0 0. 0 0. 0 0. 0 0. 0 End of Year Rental Equip ment Value2005 PF20062007200820092010 RAC8,176. 08,653. 09,092. 09,538. 09,910. 010,470. 0 HERC1,857. 01,933. 02,011. 2,081. 02,153. 02,218. 0 10,033. 010,586. 011,103. 011,619. 012,063. 012,688. 0 Corporate Leverage 2005 PF20062007200820092010 Gross Corp Debt5,296. 0 4,911. 8 4,438. 8 3,865. 8 3,180. 7 2,303. 5 Excess cash (proportional to fleet size on book)526. 4 553. 0 517. 0 516. 0 444. 0 625. 0 Net Corp Debt (Gross less XS Cash of $526. 4)4,769. 6 4,358. 8 3,921. 8 3,349. 8 2,736. 7 1,678. 5 Corp EBITDA/cash interest 2. 38 x 2. 65 x 3. 01 x 3. 43 x 4. 08 x Valuation Preliminaries2005 PF Corporate EBITDA, 20101591. 0 times: EBITDA multiple (comps)5. 0 equals: 2010 enterprise value7955. 0 less: net corp debt(4769. 6) equals: 2010 equity value3185. 4 unlevered hertz beta90. 0% market risk premium5. 5% riskless rate4. 4% Cost of Equity2005 PF20062007200820092010 Net Corp Debt as % Equity Value221. 5%179. 6%145. 6%113. 6%85. 9% Levered Beta189. 3%151. 6%121. 0%92. 3%67. 3% Cost of Equity 14. 8%12. 7%11. 0%9. 4%8. 1% Valuation by Backwards Iteration Estimated Total Equity Value, Start of Year 2153. 682426. 992694. 102948. 003185. 40