Ford Motor Co. last week agreed to sell rental car and equipment company Hertz Corp. to a private equity consortium for $15 billion. The deal comes three years after Ford was first approached about such a sale, and would stand as the second-largest leveraged buyout in history.
Clayton, Dubilier & Rice (CD&R) led the transaction, with The Carlyle Group and Merrill Lynch Global Private Equity also serving as equity sponsors. The trio will invest a combined $2.3 billion in equity, with the remainder financed through $7 billion of asset-backed financing (Hertz’ fleet) and another $5 billion of bank debt and bonds. Ford says that it will receive a total of $5.6 billion through the sale, meaning that the buyers are assuming approximately $9.4 billion in debt.
J.P. Morgan, Citigroup and Goldman Sachs advised Ford on the deal, while the private equity consortium was advised by Deutsche Bank, Lehman Brothers and Merrill Lynch & Co. A losing bid was submitted by Bain Capital, Blackstone Group, Texas Pacific Group and Thomas H. Lee Partners.
CD&R has been asking Ford to sell Hertz since 2002, but initially was 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.”
In the meantime, of course, the private equity market busily went about proving that it can handle deals of any size. Not only were firms raising billions of dollars for new funds, but those same firms also were exhibiting an increased willingness to syndicate. By the time Ford signaled a change of heart on April 20, CD&R and others were ready to pounce.
“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.”
The transaction is expected to close by year-end, at which point CD&R, Carlyle and Merrill Lynch will begin the difficult work of growing the company. 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.
“We like to buy market-leading companies whose parent doesn’t have the same focus on profitability and building the business that a private equity firm can provide,” Gogel explained. “One of the magical elements of private equity is that we can be more productive and more innovative, like providing equity incentives to the senior management teams. We don’t have to deliver a certain cash-flow each quarter.”
Neither Gogel nor Ledford said to expect any major divestitures, acquisitions or management changes, except for the installation of CD&R operating partner George Tamke as chairman.
Hertz will become the world’s largest privately-held car rental company. Other private companies in the sector include ANC Rental Corp. (Alamo and National), which is owned by Cerberus Capital Management, and Enterprise Rent-a-Car.