DBRS Comments on Hertz Revised Offer for DTAG, Unaffected at BB, Trend Positive

DBRS has today commented that the ratings of Hertz Corporation (Hertz or the Company), including its Issuer Rating of BB, are unaffected by the Company’s announced amended merger agreement with Dollar Thrifty Automotive Group, Inc. (DTAG). The trend on all ratings is Positive.

Hertz announced it has amended the merger agreement increasing the purchase price of DTAG to $1.43 billion, compared to $1.1 billion originally agreed to in April 2010. Under the amended agreement, DBRS estimates that the cash portion of this deal (excluding the special dividend to be paid by DTAG at closing) will increase to approximately $1.0 billion. Given Hertz’s available liquidity, which totaled $1.7 billion at June 30, 2010, the anticipated cash flows to be generated by the combined entity, earnings up-lift and the anticipated cost savings resulting from the transaction, DBRS sees the approximate $300 million increase in the cash portion of the purchase price as manageable.

Concurrently, to satisfy anticipated regulator concerns Hertz has announced that it has begun to the process of divesting its Advantage Rent-a-Car brand. Given the limited size and scale of the Advantage brand, DBRS considers the divesture as having no material impact to the overall solid Hertz franchise. More importantly, DBRS sees the benefits gained from the acquisition of DTAG as significantly outweighing those lost due to the divesture.

Consistent with DBRS’s views at the time of the original merger announcement, DBRS considers that the proposed transaction will be a long-term positive for Hertz and will further strengthen Hertz’s overall solid franchise. The proposed acquisition combines two complementary businesses, Hertz with its strong presence in the premium and corporate travel segment and DTAG, with its solid position in the value-oriented leisure travel segment. DBRS sees very little overlap in the businesses and, with the successful completion of the proposed transaction, Hertz will gain immediate scale in the value-priced customer segment, in which it currently lacks a significant presence.

Hertz’s earnings generation ability will be enhanced, as the acquisition is expected to be earnings accretive upon closing. Furthermore, earnings generation capacity will benefit from the $180 million of cost savings from projected synergies. DTAG’s corporate obligations will be repaid prior to closing, and Hertz will assume or refinance DTAG’s vehicle related debt, which totaled $1.4 billion at June 30, 2010.

DBRS notes that, as with any acquisition, there are certain integration risks involved in this proposed transaction. However, given the size of this proposed transaction and the complementary nature of the businesses, DBRS expects this risk to be well managed.

The proposed transaction is subject to customary closing conditions, DTAG shareholder approval and regulatory approvals. Assuming a successful execution of the proposed transaction, DBRS will look for realization of the aforementioned benefits and synergies. Ratings will benefit from the Company’s ability to realize the benefits of the broadened customer base gained through this acquisition, while sustaining its strong global brand, and further strengthening the balance sheet.

Note:
All figures are in U.S. dollars unless otherwise noted.

The applicable methodology is Rating Finance Companies Operating in the United States, which can be found on our website under methodologies.