DBRS Comments on Avis Budget’s Announcement to Acquire Avis Europe; Unaffected at B (high), Stable

DBRS Inc. (DBRS) has today commented that the ratings of Avis Budget Group, Inc. (Avis Budget or the Company), including its Issuer Rating of B (high) and Senior Unsecured Debt rating of “B”, are unaffected following the Company’s announcement that it has agreed to acquire Avis Europe plc (Avis Europe) for the cash purchase price of $1.0 billion. The trend on all ratings is Stable.

DBRS sees the proposed transaction as a long-term positive for Avis Budget that will further strengthen Avis Budget’s solid franchise. Specifically, the Avis Europe franchise includes corporate-owned locations in Europe and licensed operations in Africa, the Middle East and Asia. Given Avis Budget’s existing international operations in Australia, New Zealand, Latin America and the Caribbean, this transaction further expands Avis Budget’s global presence including access to the faster growing emerging markets like China. Avis Budget’s earnings generation ability will be bolstered, as the acquisition is expected to be earnings accretive upon closing. Moreover, this transaction adds a level of diversity to the revenue stream. Indeed, in 2010, 75% of Avis Budget revenue was generated in Domestic Car Rental, 18% from International operations and 7% from Truck Rental. Pro-forma, Avis Budget’s 2010 revenues would have been 57% Domestic Car Rental, 37% International and 5% from Truck Rental. Furthermore, earnings capacity will benefit from the estimated $30 million of cost savings from synergies, which DBRS views as conservative and attainable.

Avis Budget intends to fund the transaction with $400 million of available cash, issuance of up to $250 million of equity and $350 million of incremental debt from either new issuance or existing bank facilities. Given the proposed funding structure of the transaction and Avis Europe’s modest debt load, DBRS does not anticipate noteworthy movement in Avis Budget’s leverage metrics. Nonetheless, should the final financing package for the acquisition include a larger proportion of new debt issuance than currently planned, ratings could come under negative pressure.

DBRS notes that leverage (corporate debt-to-adjusted EBITDA) has been reduced over the last several years. Given the increased earnings capacity gained from the acquisition, DBRS expects that Avis Budget will continue its efforts to reduce leverage post-acquisition.

In DBRS’s opinion integration risks are low with this transaction as the companies share branding and operate on the same technology platform. Moreover, there is essentially no overlap of physical locations or fleet. Furthermore, DBRS sees the improving industry fundamentals, which include increasing rental demand and volumes, solid pricing, and improved market-wide access to funding, as producing a favorable operating environment which should benefit a successful integration.

Moreover, in leaving the ratings unchanged, DBRS assumes that Avis Budget successfully raises the equity, focuses on integrating Avis Europe and will forgo acquiring Dollar Thrifty Automotive Group, Inc. (DTAG). However, should Avis Budget recommence its pursuit of acquiring DTAG while integrating Avis Europe, ratings would likely come under negative pressure reflecting heightened integration risks and the likely stretched balance sheet of the Company.

Assuming a successful execution of the proposed transaction, DBRS will look for realization of the aforementioned benefits and synergies. If Avis Budget realizes the benefits of the broadened customer base gained through this acquisition, while sustaining its strong global brand, and further strengthens the balance sheet ratings could see upward ratings migration. Conversely, failure to capture the anticipated uplift to earnings or to restore the positive trajectory in leverage could result in negative ratings pressure.

Note:
All figures are in USD unless otherwise noted.

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

The sources of information used for this rating include the issuer. DBRS considers the information available to it for the purposes of providing this rating was of satisfactory quality.

Lead Analyst: Steve Picarillo
Approver: Alan G. Reid
Initial Rating Date: 16 December 2009
Most Recent Rating Update: 23 February 2011