Vehicle rental giant The Hertz Corp. (NYSE:HTZ) is undertaking a massive overhaul.
Citing difficult market conditions, the Park Ridge, N.J.-based company detailed a number of strategic actions on Nov. 5, including plans to eliminate 1,400 jobs and close a total of 80 locations. The same day, the company also reported disappointing results for the latest quarter and withdrew plans to provide a financial outlook for fiscal 2009, a move that underlines the uncertainty it’s facing.
Hertz is majority-owned by
Going by the stock’s current levels, easily the lowest in its two-year trading history, that stake is worth a fraction of its value at the time of the IPO. At press time, the shares were making a convincing move below $5, putting its total market capitalization at just above $1.6 billion. Hertz shares debuted in November 2006 on the New York Stock Exchange at $15 each. Their peak since that time was $27.20, a level reached in July 2007. The all-time low, scraped on Oct. 24, is a paltry $3.64. Most of the damage has been done in 2008, as the shares are off about 70 percent for the year.
Beyond the bear market for stocks, Hertz’s numbers shoulder some of the blame for the decline. For the third quarter ended Sept. 30, the company posted adjusted net income, which excludes one-time items, of $106 million, or 33 cents a share, down 50 percent from its year-ago equivalent earnings of $212.2 million, or 65 cents a share. It was also well below the average estimate of analysts polled by Thomson Reuters for a profit of 55 cents a share. Including items, such as restructuring charges, the company’s profit for the September quarter shrank to $17.7 million, or 5 cents per share. Worldwide revenues for the three-month period came in at $2.42 billion, down 1.1 percent from $2.45 billion for the same period last year. The company ended the quarter with total debt of $12.84 billion. Going forward, it said it wouldn’t meet its prior outlook for adjusted earnings of $340 million to $375 million, or $1.05 to $1.15 a share, for 2008, and that it’s suspending the practice of providing a performance view.
“The impact of reduced demand, lower pricing and residual market conditions on profitability has become increasingly difficult to assess,” the company said in a statement, adding later that it would wait for the economy and market conditions to stabilize before lifting the suspension.
The company’s turnaround plan has a number of elements. The initiatives include accelerating efforts to prune vehicles from its fleet, spending more on maintenance to prepare cars for sale, imposing penalties on customers who bring vehicles back early, and increasing advertising for its new gasoline refueling and service guarantee programs. Headcount has been an issue for Hertz all year. In the first quarter, the company cut 950 jobs in the United States and Europe. The second quarter brought plans to cut another 400 jobs and to close 22 branches of its U.S. equipment rental business. Now, the latest plan is to reduce headcount by another 1,400, or nearly 5 percent, of its current 29,350 total.
The trouble at Hertz, however, is likely not having too catastrophic effect on the fund performance of its sponsor-owners, as they were quick to recoup many times their invested equity in the company. In a July 2007 interview that Buyouts conducted with several CD&R partners who led the Hertz deal, it was noted that CD&R had at that point already locked in a 3x return on its investment in the vehicle and equipment rental company. One of the boons to the sponsors, in addition to the IPO and the secondary offering, was a $1 billion loan facility Hertz entered in June 2006 that was primarily used to pay its owners a dividend of $4.32 per share. The IPO, whose proceeds were used to pay back that loan, netted a total of $1.3 billion, while the shares sold in the secondary in June 2007 went for $22.25 a piece.