debt
Did private equity hurt Hertz?
May 9, 2013: 3:35 PM ET
Is Hertz better off today than it was seven years ago?
FORTUNE -- Hertz's private equity sponsors sold their remaining shares earlier this week, fully existing the company more than 7 years after buying it from Ford Motor Co. (F).
That deal came in the midst of private equity's "golden age," and was one of that era's most-criticized transactions. Not so much the original purchase, but rather the subsequent $1 billion dividend recap and initial public offering -- both of which were completed less than one year after the original buyout.
Here is what Businessweek wrote at the time, under a headline Buy It, Strip It, Then Flip It: "The quick 'strip and flip' the Hertz buyout firms are pulling off makes them look more like fast-buck artists than thoughtful turnaround specialists... The question is: Will the Hertz deal be good for public investors?"
Well, now that the private equity firms are gone, let's take a look.
Hertz (HTZ) went public at $15 per share in November 2006, and opened trading today at $25.75 per share. That's a 71.67% gain, compared to a 16.42% gain in the S&P 500 over the same period. Sure there were some major down periods -- Hertz shares sunk as low as $1.55 per share during the 2008 financial crisis -- but long-term investors who bought at IPO have been rewarded.
Moreover, Hertz was valued at approximately $15 billion (including debt) when acquired by The Carlyle Group (CG), Clayton Dubilier & Rice and Merrill Lynch Private Equity. Today's enterprise value is in excess of $25.5 billion.
But let's go a step beyond asking if Hertz was a good IPO candidate in 2006, to the more fundamental question of if the underlying company is stronger today than when it was under Ford's control. Here are some of the major metrics, comparing annual results from 2005 to annual results from 2012 (Please note that the original buyout closed on 12/20/05, so the 2005 data includes 11 days of results under private equity ownership):
Source: CapitalIQ
Notes: (1) The original buyout closed on 12/20/05, so 2005 data includes 11 days of results under private equity ownership. (2) Hertz completed $2.3 billion purchase of Dollar Thrifty on 11/20/2012, so 2012 data includes 41 days of combined financials.
Looks to me like all of the top-line numbers except for net income are better today than before private equity got involved, perhaps due to big corporate additions like Dollar-Thrifty and strategic moves like adding around 1,000 new off-airport locations. That said, we can't ignore that Hertz also had over $15 billion in debt at year-end 2012, or about 50% more than it had at the time of its original buyout.
To be sure, the biggest winners in the Hertz buyout were the private equity firms. They generated around $3.7 billion in investment profits off of their original $2.3 billion investment (2.6x cash-on-cash return), which works out to around a 30% gross internal rate-of-return. But they didn't do so at the expense of the company, as many feared when Hertz was originally returned to the public markets. Instead, it seems to have been a win-win, even if the private equity folks won a bit more than everyone else.
Sign up for Dan's daily email newsletter on deals and deal-makers: GetTermSheet.com
-
Despite cautious talk, banks push risky deals
Citigroup, Goldman Sachs, and Morgan Stanley preach caution, even as their bankers return to pre-crisis deals.
FORTUNE -- On Citigroup's recent conference call, CEO Michael Corbat said he was still worried about the economic recovery and the market.
"Looking ahead, I believe the environment is going to remain challenging," Corbat told his bank's investors. "Europe's issues, as the situation in Cyprus shows, still have the potential to rattle the markets and impact MORE
Stephen Gandel, senior editor - Apr 24, 2013 10:15 AM ETPosted in: banks, Citigroup, collateralized loan obligations, debt, Goldman Sachs, investing, morgan stanley, Wall Street -
Municipal bonds: A train wreck waiting to happen
Beware of munis priced at bubble levels. They'll always pop in the end.
FORTUNE -- Investment-grade municipal bonds used to be Snooze City. You know, the kind of thing that we retail investors buy, stick into our portfolios, and then forget about. But these days, thanks to the Federal Reserve's holding down interest rates and the prospect of steeper income taxes facing top-bracket types, high-grade munis, which pay tax-free interest, have MORE
Allan Sloan, senior editor-at-large - Dec 5, 2012 5:00 AM ET -
Three ways to make college more affordable
With student loan balances only growing and tuition rates rising, universities must change the way they do business. Here's how they can start.
FORTUNE – While Americans are paying down most of their debt these days, student debt remains a huge burden. Some are even questioning if it has become too easy to take out an education loan.
Outstanding loan balances for the third quarter of 2012 grew to $956 billion, a MORE
Nin-Hai Tseng, Writer - Nov 29, 2012 12:28 PM ETPosted in: American education, debt, Education, financial aid, higher education, Macro, student loans, tuition -
Debunking private equity's debt 'problem'
Study argues that debt doesn't destroy private equity-backed companies.
FORTUNE -- Private equity has a reputation for bankrupting companies, by using copious amounts of debt to finance the original acquisition. A new study, however, finds that private equity ownership is no more likely to result in failure than is non-private equity ownership. Moreover, when a PE-backed company does fail, the debt is not usually to blame.
Well, at least in the UK.
The MORE
Dan Primack - Nov 27, 2012 1:00 PM ET -
The debt wall that wasn't
Why private equity didn't create a second credit crunch.
FORTUNE – A major financial worry coming out of the recession was a looming "wall" of high-yield bond maturities, largely related to a glut of leveraged buyout transactions completed in 2005 and 2006. Could all of that debt be repaid on time and, if not, would America experience a wave of corporate bankruptcies that would both decrease credit availability and increase unemployment?
So MORE
Dan Primack - Aug 30, 2012 4:45 PM ET -
Best Buy bid shows leverage is back
Bid for electronics retailer not out of line with recent debt-filled deals.
FORTUNE - Analysts' reaction to the bid to buy Best Buy (BBY) from the company's former chairman was this: Not going to happen. They said private equity investors would balk at the amount of debt Richard Schulze would need to raise to make the deal fly. "This would be a very hard deal to pull off," says Michael Pachter, MORE
Stephen Gandel, senior editor - Aug 7, 2012 5:00 AM ET -
Household net worth jumps $2.8 trillion
Market increase creates the biggest quarterly gain in net worth since the end of the financial crisis.
Fortune -- Feeling richer in 2012? According to the Federal Reserve you are.
The net worth of households rose a collective $2.8 trillion in the first three months of 2012. That was the largest quarterly rise in household wealth since the beginning of the financial crisis, and roughly equates to an increase of $9,000 per MORE
Stephen Gandel, senior editor - Jun 7, 2012 1:29 PM ET -
Why you shouldn't buy bonds anytime soon
You'd have to be a psychic to know where stocks are headed, but you don't need a crystal ball to know that corporate bonds are a bad bet.
FORTUNE -- It's one of those eternal truths. Just as you can be sure that daffodils and forsythia will blossom this time of year, you can be sure that mutual fund investors will collectively act like blooming idiots by doing the wrong thing MORE
Allan Sloan, senior editor-at-large - Apr 11, 2012 5:00 AM ET -
New EU bailout will fuel a debt supercycle
There's an economic theory that more debt is needed to emerge from problems created by each new bubble, which in turn makes the next bubble even worse. Can we stop it?
FORTUNE -- Here's the paradox the developed world faces today: easy credit is the solution to financial problems, and easy credit is the source of financial problems. This is the dilemma European leaders face when aiming to manage the terrible fiscal MORE
Oct 24, 2011 2:07 PM ET
