BFE – Best Flip Ever?


Hertz recently announced that it plans to IPO less than one year after the company was sold by Ford to a group of buyout firms.

It’s difficult to imagine what the group did to pretty-up Hertz for a public sale in that amount of time. Hertz first filed in July — barely six months after completing the deal. That filing helped inspire a BusinessWeek story “Buy It, Strip It, Then Flip It.”

When Ford first started to explore shedding Hertz as part of restructuring, a tax-free spin-off to shareholders was an obvious route, and the company went so far as to file an S-1. However, they instead decided to raise cash – the sale resulted in $5.6 billion, which raised their year-end cash to $25 billion, not including $6 billion in liquidity in the VEBA. Oh, and they recorded $1.5 billion as net income (although taxes for Ford would be a high-class problem at this point).

Ford almost certainly left money on the table. For its part, Hertz will have enormous fees taken out of it from the sale and subsequent re-offering, and the former parent hasn’t made great strides in restructuring in the interim. Also, the cash raised has meant little and the company still has $23.6 billion total. Meanwhile pre-tax profit at Ford was about $525 million lower during the first nine months because of Hertz’s absence.

So is this yet another complaint about mega-funds flipping companies while adding little value? No, because as Canada Bill Jones famously said, “it’s immoral to let a sucker keep his money.” Anyone upset over how this deal turned out should blame activist hedge funds. The value added of many in that group is more questionable than that of a nine-month private equity owner.

In some ways, the relationship between private equity and hedge funds is symbiotic, but there are natural tensions as well (and just wait until some of that second-lien paper starts to blow up). This is probably an instance where that tension should have been to the benefit of Ford shareholders, but most “activists” are small-ball players.

In September, Ben Stein penned a remarkable editorial for the NY Times that said management buyouts “should be illegal on their face.” He wasn’t concerned with deals like Hertz, but rather deals like Kinder Morgan and HCA. Obviously, his proscription is a bit extreme. But if the market works, and the so-called activists charging 20% for long-only equity management start paying attention, sweetheart PE deals could face another strain.

P.S. – I know this won’t be the BFE. My guess for that title would be Formula 1 (a deal or two ago). I would be interested in other nominees.