DBRS Comments on Hertz Acquisition of DTAG; Issuer Rating at BB, Trend Negative

DBRS, Inc. (DBRS) is today commenting on Hertz Corporation (Hertz or the Company) following the close of its acquisition of Dollar Thrifty Automotive Group, Inc. (DTAG). DBRS rates Hertz’s Issuer Rating at BB. The trend on all ratings is Negative.

On November 20, 2012, Hertz announced that it had completed the acquisition of DTAG for $2.4 billion in cash and the assumption of approximately $1.5 billion of DTAG fleet-backed debt. DTAG had no corporate debt outstanding as of the acquisition date. DBRS notes that the final closing conditions, including the required divestures of Hertz’s Advantage Rent-A-Car brand and certain other assets by the Federal Trade Commission (FTC) were largely within DBRS’s expectations. The ratings were placed on Negative trend on August 28, 2012 following the announcement of the proposed transaction.

While DBRS considers the transaction as a long-term positive for Hertz strengthening the Company’s overall franchise, the Negative trend reflects DBRS’s view that the completed acquisition entails certain near-term concerns including a modest increase in leverage and integration risk. Further, DBRS is concerned that the transaction somewhat weakens Hertz’s financial profile at a time of heightened uncertainty about the strength of the global economy. Although modest, the increase in leverage reverses recent progress achieved by the Company in reducing its overall leverage. Importantly, DBRS notes that Hertz has committed to restoring leverage to pre-acquisition levels within twelve months. DBRS comments that the acquisition includes substantial integration risks including cultural, technology platforms and fleet management. Nonetheless, Hertz’s successful track record of integrating past acquisitions and the complementary nature of the businesses, somewhat mitigates this risk.

Despite these concerns, DBRS views the transaction as bolstering the franchise combining 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. Moreover, DBRS sees very little overlap in the businesses and, Hertz gains immediate scale in the value-priced customer segment, in which it historically lacked a significant presence.

Hertz’s earnings generation ability will be enhanced, as the acquisition is expected to be earnings accretive from closing. Furthermore, earnings generation capacity will benefit from the $160 million of cost savings from projected synergies over the next 24 months.

Going forward, DBRS will look to Hertz’s ability to capture the benefits of the acquisition, while managing the aforementioned risks in an uncertain operating environment. To this end, DBRS will monitor Hertz’s ability to defend and grow market share while realizing the anticipated annual cost synergies. Further, DBRS expects Hertz will utilize its enhanced earnings and cash flow generation power to drive improving credit metrics over the medium-term.

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

The principal 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 company documents. DBRS considers the information available to it for the purposes of providing this rating was of satisfactory quality.

This rating is endorsed by DBRS Ratings Limited for use in the European Union.

Lead Analyst: David Laterza
Approver: Alan G. Reid
Initial Rating Date: 16 May 2001
Most Recent Rating Update: 28 August 2012

For additional information on this rating, please refer to the linking document under Related Research.