In late summer 2005, Greg Ledford, managing director and head of automotive and transportation buyouts at the Carlyle Group, found himself examining his BlackBerry atop the Great Wall of China. Though he had planned to be sightseeing with his daughter, his immediate focus was to finalize the terms of the second-largest leveraged buyout in history. The target in question was Hertz, a subsidiary of the Ford Motor Company, which was up for sale. Ledford needed to decide the price he and his co-investors would offer for Hertz as well as assess the potential returns and risks of the deal.
Already months of work, many dollars of due diligence, and arrangement of tentative financing had gone into the bid. Complicating matters, he knew he faced tough competition from a rival buyout group, no doubt engaged in a similar process.
The race to win Hertz had been set in motion several months earlier, when William Clay Ford Jr., the chairman and CEO of Ford, announced plans to explore “strategic alternatives” for Hertz in April 2005.
That announcement was followed in June 2005 by the filing of an S-1 registration statement setting up a “dual track process” that would result in a Hertz IPO should other sale prospects fail. Ledford, who spoke to senior Ford managers on a regular basis, had gleaned that there was interest on Ford’s part for an outright sale of Hertz. He believed a private sale that was competitive with an IPO would be viewed favorably by Ford due to its greater upfront cash proceeds and certainty of execution.
When no strategic buyer surfaced, Carlyle, Clayton, Dubilier & Rice (CD&R), and Merrill Lynch Global Private Equity (collectively “Bidding Group”) joined forces to bid on Hertz. It faced competition from another buyout consortium that included Texas Pacific Group, Blackstone, Thomas H. Lee Partners LP, and Bain Capital LLC.
This case was prepared by Susan Chaplinsky, Professor of Business Administration, Darden Graduate School of Business, and Felicia Marston, Professor, McIntire School of Commerce. It was written as a basis for class discussion rather than to illustrate effective or ineffective handling of an administrative situation.
Hertz’s ownership history was characterized by a series of sales, public offerings, and leveraged buyouts (Exhibit 1).1 The company was first established in 1918 by 22-year-old Walter L. Jacobs as a car rental operation with a modest inventory of 12 Model T Fords that Jacobs personally had repaired and repainted. The venture was immediately successful, leading Jacobs to expand and generate annual revenues of approximately of $1 million within five years. At the $1 million mark, in 1923, Jacobs sold his company to John Hertz, president of Yellow Cab and Yellow Truck and Coach Manufacturing Company, who gave his name to the company, creating “Hertz Drive-Ur-Self System” and a brand name that had endured ever since.
John Hertz sold his investment three years later to General Motors (GM). In 1953, GM in turn sold the Hertz properties to the Omnibus Corporation, which simplified the company’s name to “The Hertz Corporation” in connection with a public stock offering on the New York Stock Exchange (NYSE). In late 1987, together with Hertz management, Ford Motor Company participated in a management buyout of the company. Hertz later became an independent, wholly owned subsidiary of Ford in 1994. Less than three years later, Ford issued a minority stake of shares through a public offering on the NYSE on April 25, 1997. In early 2001, Ford reacquired the outstanding shares of Hertz and the company again became a wholly owned subsidiary of the Ford Motor Company.
The large investor interest in Hertz over time was due in part to the company’s proven financial ability. In fact, the company had produced a pretax profit each year since 1967. During the period 1985 to 2005, revenues had grown at a compound annual growth rate of 7.6% with positive year-over-year growth in 18 of those 20 years. Over the past same period, Hertz had emerged as a truly global enterprise; it had car rental operations in 145 countries, and more than 30% of its total revenues were from outside of the United States. Hertz was among the most globally recognized brands and had been listed in BusinessWeek’s “100 Most Valuable Global Brands” (limited to public companies) in 2005 and every year since it was eligible for inclusion.
Hertz currently operated in two business segments: car rental (“Hertz Rent A Car” or “RAC”) and equipment rental (“Hertz Equipment Rental Company” or “HERC”). In 2005, it was estimated that RAC would comprise 81% of company revenues and HERC 19%. RAC was supported by a network of franchises that together with company-owned facilities operated in more than 7,600 airport and local locations throughout the world. The company led its competition in the airport car rental market in Europe with operations at 69 major airports. Hertz owned and leased cars from more than 30 manufacturers, most of which it had long-term leasing.