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Contributors: Douglas McIntyre Jon C. Ogg

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Monday, July 17, 2006

Hertz IPO and Its Impact on Others

Stock Tickers: HTZ, F, CD

Hertz has refiled for an IPO last week under the ticker "HTZ." This is quite a fast turnaround for an IPO spin-off, even for a private equity firm. Private-equity firms Clayton Dubilier & Rice, the Carlyle Group and Merrill Lynch Global Private Equity bought Hertz from Ford (F) on Dec. 21, 2005. Under terms of the agreement, Ford was to receive $5.6 billion for Hertz' equity but the entire value of the deal was about $15 billion after the Debt potion was included.

The company also withdrew the old S-1 filing for an initial public offering that was made last year, when the company was owned by Ford Motor Co. The company restated 2005 results to indicate that a tax expense increased to $31.3 million from $3.8 million from repatriation of foreign capital back into the US, which will lower net income by $27.5 million to $371.3 million.

The estimated offering is at $1 Billion US, but that figure can change on a moment's notice. If you compare this IPO to what the purchase price was last year, you may try to make a guess on thew ultimate values being sought happen to be.

Underwriters for the issue are Goldman Sachs, Lehman, Merrill Lynch, Deutsche Bank and JPMorgan.

So unfortunately we do not know the true valuation terms yet, but you can bet that will start coming out relatively soon. This private equity syndicate will most likely be seeking a value for the stock here in the vicinity of $6.5 billion or more to make up for the interest and to make profit on their investment. That number is conjecture and estiamted by personal opinion, so that could be off by an inch or by a mile (or a centimeter or kilometer for our International readers).

Perhaps the most interesting impact of this IPO is how the valuation will translate into outside rental car companies. So, let's discuss Cendant (CD). Cendant owns both Avis and Budget, competitors of Hertz. It is no secret that Cendant is in the process of divesting and consolidating operations to unlock shareholder value. What will this make Cendant worth? That is a subject for debate as Cendant stillowns travel and real estate operations, but you should just assume that the Hertz IPO will impact the Cendant valuation once we have more data.

Hertz listed its 2005 revenues at $7.3147 Billion with expenses of $6.7398 billion, and it put net income at $371.3 million. This was based on 229.5 million shares, which resulted in $1.62 EPS.

For 2005, Avis showed rental revenues of about $3.2 billion and Budget showed rental revenues of approximately $1.6 billion. Keep in mind that "car renatals" portion of Hertz was $5.8 billion with the rest of revenues coming from equipment and ancillaries, so there may be some room for play in these numbers. Avis and Budget have other operations noted with revenues but comparing these will take more time to interpret out of operations.

Regardless of the Hertz IPO terms, this IPO should actually help put a better definition to the value of Cendant and should let those shareholders know what sort of demand to expect from the street for the value of its rental car operations.

Jon C. Ogg
July 17, 2006

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