Whether it’s Yao Ming, a stretch limousine, or perhaps your latest credit card bill, size is often tough to ignore. But even while the Hertz acquisition was the second-largest LBO of all time, it wasn’t the sheer size that made Hertz an impressive deal. Rather, it was the time, thought and creativity that went it to getting it done that won it the Buyouts Mega Deal of the Year. Clayton, Dubilier & Rice (CD&R) led the $15 billion transaction, with The Carlyle Group and Merrill Lynch Global Private Equity also serving as equity sponsors on a deal that took three years from start to finish and was financed with the help of more than $12 billion of loans and bonds.
“In 2001, we looked at ANC Rental Corp. (Alamo and National), [which is now owned by Cerberus Capital Management,] and Budget, but we couldn’t get comfortable with those deals,” says Nate Sleeper, a partner with CD&R who was involved in the initial discussions with Ford. “But that experience led us to focus on Hertz. We started looking into Hertz in 2002, and we started a dialogue with the people from Hertz. We were looking at the feasibility of the deal and trying to show Ford how an LBO could work.”
CD&R set its sights on Hertz for two reasons. “They are the clear market leader with the best brand and most attractive customer base. Second, Hertz is one of the only companies that reinvested post 9/11. They made some IT investments in the last few years,” says Sleeper.
However, CD&R was initially unable to persuade the automaker-or its bankers-that a private equity sale would be preferable to an IPO. “I think they were reluctant for a couple of reasons,” said Don Gogel, president and CEO of CD&R. “It was a very complicated financing structure, and there maybe was some concern that the deal would be too big for a private equity firm to handle.”
J.P. Morgan, Citigroup and Goldman Sachs advised the seller, Ford, on the deal, while Deutsche Bank, Lehman Brothers and Merrill Lynch & Co. advised the private equity consortium.
Finally last year, CD&R had indeed convinced Ford that an LBO wasn’t such a bad idea after all, but that didn’t automatically make CD&R the beneficiary of Ford’s decision. Like all big deals, the company was still put through an auction process, and one of the many interested parties was The Carlyle Group.
“I have relationships with people at Ford, so I asked them who would be a good partner,” recalled Greg Ledford, head of The Carlyle Group’s automotive practice. “All fingers pointed to CD&R… and we ended up as the beneficiaries of a lot of the work they had already done. CD&R had worked with Merrill in the past, which made the partnership seamless and cohesive.”
Sponsor-Backed Meets Asset-Backed
A consortium made up of Bain Capital, Blackstone Group, Texas Pacific Group and Thomas H. Lee Partners were the competing bidders, posing a strong enough threat that CD&R knew its group had to get ducks in a row quickly.
“The other group was formidable, but we might have had a better mouse trap, so to speak with this financing,” says Leford.
Deutsche Bank and Lehman Brothers led the financing on the deal, which is partly credited for the deal being completed. The private equity trio invested a combined $2.3 billion in equity, with the remainder financed through $7 billion of asset-backed securities (ABS) (Hertz’s fleet) and another $5.6 billion of bank debt and bonds. Ford received a total of $5.6 billion through the sale, meaning that the buyers are assuming approximately $9.4 billion in debt. The deal carries a 2.4x debt-to-equity ratio.
While rental car receivable securitizations are nothing new, using one to help fund a buyout was a novel concept. “ABS financing has never been used before in terms of a rental car buyout. And the sheer size of this deal made the financing complex,” said a banker familiar with the deal. “A lot of different firms had to work together to make this happen and they did it. There was a tremendous amount of thought that went into this structure, probably more than I have seen before.”
Deutsche Bank and Lehman took the lead, while Merrill Lynch, Goldman Sachs and JPMorgan, B & P, RBS and Alliant Bank all participated. “This was a very complex deal because of the financing, but this structure allows for lots of liquidity and flexibility going forward,” says Leford.
“Banks lined up for this deal because it’s a premier name in the industry and it rents heavy equipment as well, which makes it diverse,” a source adds.
The financing for the transaction provides a solid capital structure to fund the company’s long-term growth. “There were really three goals here. We needed a stable capital structure, which we got by using asset securities and loans, and we created a structure with the ABS financing that gives us flexibility for growth. Plus, we had $2 billion of liquidity on day-one,” says Sleeper.
Hertz’s revenues have increased at an annual rate of around 9% for the past four years, with 12.5% growth in the first-half of 2005. These are fairly strong figures, but the buyers believe they can be strengthened even further once Hertz is no longer treated like a non-core asset.
“Hertz has a tremendous market position. When it was inside of Ford it was an asset to worry about. There is a tremendous opportunity to optimize operations and drive return on capital. Even when things were good Hertz was operating at 600 or 700 basis points [below the optimal level,]” says Sleeper. “The management just had a different set of priorities.”
The firm is now being run by George Tamke, who serves as chairman. Previously, Tamke served as CEO of Kinko’s on behalf of CD&R. Hertz is now the world’s largest privately-held car rental company.