(Reuters) – Avis Budget fired its first salvo in what could turn out to be a protracted takeout saga for Dollar Thrifty, as the dwindling number of players in the car rental market is likely to draw scrutiny from antitrust regulators.
Avis Budget (CAR.N) surprised investors on Monday when it said it was willing to make a “substantially higher” bid for Dollar Thrifty (DTG.N), which had already agreed to a $1.2 billion buyout offer from Hertz Global (HTZ.N).
But neither Avis nor Hertz is going to have an easy time persuading regulators to allow them to take over the No. 4 car rental company in the United States.
“I would imagine that either deal would get a lot of scrutiny as the consolidation in the rental car business has been rapid and large,” said John Briggs, an antitrust expert with the law firm Axinn, Veltrop & Harkrider LLP.
“In the end, it seems like three major companies may be all that remain and this is enough to trigger pretty strong scrutiny,” Briggs said.
Avis, Hertz and Dollar Thrifty, along with market leader Enterprise, control about 96 percent of the U.S. car rental market and operate eight brands among them — Enterprise has three, while Avis and Dollar Thrifty each have two.
Hertz is the only player with just one brand, focused on business travellers. With the addition of Dollar Thrifty, which caters to the value market, it would have three.
Avis, if it decides to make an offer, would have four brands, and the biggest share in the budget rental market. Analysts consider it unlikely that Enterprise, which has 53 percent of the overall market and has three brands, would make an offer for Dollar Thrifty.
“This will be a long process either way because the regulatory process would take nine to 12 months,” said MKM Partners analyst Christopher Agnew
Antitrust expert Briggs said antitrust clearance might come down to whether Dollar Thrifty is viable on its own and what its alternatives are.
Dollar Thrifty reported strong first-quarter results two days after the Hertz announcement, suggesting it could do well as a stand-alone company and had no need to be taken over.
The company has said it never put itself up for sale and the Hertz offer was unsolicited.
HERTZ HAS THE UPPER HAND
In a letter to Dollar Thrifty shareholders, Avis said the antitrust analysis and clearance timetable for an Avis-Dollar Thrifty deal would be comparable to those associated with a Hertz-Dollar Thrifty transaction.
But industry experts don’t agree.
“Sounds as if Avis is looking to prevent Hertz from gaining a foothold in the same space occupied by Budget, which is owned by Avis,” said Briggs, adding that it would have a harder time than Hertz getting clearance for that reason.
Peter Zuger, manager of Touchstone Mid Cap Value Fund, said Hertz would find it easier than Avis to win regulatory approval.
According to its merger agreement with Dollar Thrifty, Hertz agreed to divest its Advantage brand and up to $175 million worth of revenue-generating business lines or locations to get antitrust clearance.
Hertz bought Advantage, with annual revenue of $146 million, out of bankruptcy in 2009.
Analysts said Hertz is the best fit for Dollar Thrifty, offering $180 million or more of synergies that would be unlikely to to come out of a deal with either of the other two players.
“They both bring something to each other and therefore I think it is a deal that makes a lot of sense,” said Neil Abrams of car rental consultancy Abrams Consulting Group. “Their business models are complementary.”
“This was really the only major deal left,” Abrams said.
Avis and Enterprise already have a considerable presence in the leisure market that Hertz is targeting with the Dollar Thrifty acquisition.
In fact, Avis Budget’s indication of its desire to bid for Dollar Thrifty surprised several analysts who had ruled out bids from Avis and Enterprise due to regulatory issues.
The likelihood of a private equity bid is low, though these firms have shown interest in the industry in the past.
In 2005, an investor team comprising of Carlyle Group [CYL.UL], Clayton, Dubilier & Rice and Merrill Lynch Global Private Equity acquired Hertz from Ford (F.N) for about $15 billion including debt.
SHAREHOLDER APPROVAL ANOTHER ISSUE
Despite Avis Budget’s promise of a higher offer, a big shareholder overlap between Hertz and Dollar Thrifty might make it easier for their deal to get shareholder approval even if Dollar Thrifty investors think the offer price is low.
Several of the large shareholders in each company own stakes in the other, including T. Rowe Price Associates, Vanguard Group, BlackRock Institutional Trust Co and Fidelity Management & Research.
(Additional reporting by Diane Bartz in Washington and Fareha Khan in Bangalore; Editing by Saumyadeb Chakrabarty and Mike Miller)