Did private equity hurt Hertz?

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.

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Posted in: Carlyle Group, Clayton Dubilier, debt, Hertz, merrill lynch, Private Equity

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