Case Study Hertz Corporation

13.12.2007

Case Study:The Hertz Corporation

Presentation: Mariano Mateos, Ricardo Velilla, Elias Völker

Casestudy: The Hertz Corporation 13.12.2007 2

The Bid for Hertz


Agenda

Deal Structure

How to create value

Hertz – Company Overview

Financial Engineering

Conclusion


Intro

Ford Motor Company

CD&R Other PE firms

Hertz Corporation


Hertz‘ business areas

Hertz

RAC

HERC

USA Europe

Region

Off/On-airports1,77 million cars$17 bln market revenues

180 largest airports

Off/On-airports12% share of the market

$10 bln market revenues

The third largest company

$1,2 bln revenue

The fourth largest company

$152 mln revenue


Agenda

Deal Structure

How to create value



Conclusion


Clayton, Dubilier & Rice Inc.

Private equity investment firm founded in 1978

Investments in 39 US and European businesses

Specialized in acquiring under-managed divisions

Has obtained a higher and steady return on investment

The case of Hertz


First Stage: Uninteresting Bid

YEAR 2002 CD&R began studying the

rental car business (RAC). Early in its investigation, CD&R

studied Budget and Alamo. Hertz Much more attractive. Ford dismissed the proposal as

uninteresting and unfeasible. CD&R financing challenge

Securitizing Hertz‘s rental fleet in cooperation with Lehman Brothers and Deutsche Bank

New proposals.

YEAR 2003 CD&R convinced that Hertz‘s

capital structure was inefficient. New visit to Ford The deal

could be indeed financed. Hertz was non-strategic to Ford. Ford executives remained

unconvinced as well as Hertz‘s CEO.


Second Stage: Ford sells

YEAR 2005 Early 2005 Ford core US auto business was in trouble. Monetizing Hertz One step to improve Ford balance sheet. Ford advisors recommended two tracks:

IPO Filed in June Sale of the business Proposal and preliminary bids by

July Ford made confidential financing and operating information. Hertz executives Informational meetings with potential buyers. After a month of due diligence, CD&R identified several specific

opportunities for improving operations.


Improving Hertz Operations

HERTZ

US RAC On-airport Operating Expenses

US RAC Off-airport strategy

European OpEx & SG&A

US RAC Fleet Costs

US RAC Non-Fleet CapEx

HERC ROIC


Agenda

Deal Structure

How to create value



Conclusion


Key Questions of Deal Structure

1. Can fleet be used as a source of debt capacity?

2. Can ABS financing be used for a levered buy out?

3. How can lenders be serviced and protected?


Proposed Corporate Structure

The Hertz Corporation

Domestic Subsidiaries HERC Hertz Vehicle

FinancingHertz

International

OpCo

OpCo owns rest of Hertz‘s assets Conducts all rental transactions with

customers Leases fleet from FleetCo and

provides equity for FleetCo

FleetCo

Bankruptcy remote special purpose entities provide optimized securitization for asset backed debt financing

Leasing rates from OpCo cover debt payments


Agenda

Deal Structure

How to create value



Conclusion


Goals of new capital structure

Hertz should be able to survive a severe business downturn without need to restructure or defaultStability

Hertz should be able to exploit future growth opportunities without having to refinanceLiquidity

Capital structure should enable Hertz to make large car purchases and manage fluctuations in the rental activity

Flexibility

Funds should be obtained at significantly lower cost than current capital

Lower Costs

1

4

3

2


The Layer Cake

FleetCo (in m$)Cash 526, 4

US Fleet ABS

Internat. Fleet ABS

5.256,7

1.972,4

Total FleetCo Debt 7.229,1

Fleet Enhancement Cars

Fleet Enhancement LC

Fleet Enhancement Cash

200

115,1

1.346,9

Total FleetCo Equity 1662,0

OpCo (in m$)

Sponsor Equity 2295,0

Total OpCo Equity 2295,0

ABL Facility 396

Term Loan B

Senior Unsecured Notes

1.850

2.250

Total OpCo Debt 5.296,0

Senior Sub Notes

Existing Debt

800

0

Total Capitalization: 16,482,1 m$


Advantages

New capital structure highly leverages Hertz

Long term debt agreements ensure stability

Not all debt was drawn immediately, so liquidity and flexibility was ensured

Capital Cost are lowered through extensive use of asset backed facilities


Calculation of Capital Cost1. FleetCo

Amount Interest in %Debt

US Fleet ABS 5256,7 L+60 4,94%International Fleet ABS 1972,4 L+100 5,34%

EquityTotal Equity 1662 15,83%

WACC (FleetCo) 6,24%

2. OpCoAmount Interest in %

DebtABL Facility 396 L+250 6,84%Term Loan B 1850 L+300 7,34%Senior Unsecured Loan 2250 9,50%Senior Sub Notes 800 10,75%

EquitySponsor's Equity 2295 15,83%

WACC (OpCo) 9,66%

3. Hertz TotalAmount Interest in %

DebtTotal Debt 12525,1

EquityTotal Equity 3957

WACC (Hertz) 0,07817571 7,82%

4. AssumptionsBeta 1,5

Risk Free Rate 4,34%

Market Return 12%

Tax Rate 20%


Agenda

Deal Structure

How to create value



Conclusion


The Question

Both PE-groups bid around $5,4 bln for Hertz

Ford asks for a revised bid

CD&R are considering whether $5,6 bln are still a fair price...


Original Valuation

This is what their valuation might have looked like...

Free Cash Flow & NPV Calculation based on CD&R Information2005 2006 2007 2008 2009 2010

Corporate EBITDA 1.019,0 1.254,8 1.323,7 1.396,1 1.472,3 1.552,6Net Non-Fleet CapEx 0,0 50,7 14,6 15,2 15,9 16,6Delta NWC 14,8 59,0 17,2 18,1 19,1 20,1Delta Others 2,0 7,1 2,1 2,2 2,3 2,4

FCFF 1.006,3 1.152,2 1.293,9 1.364,9 1.439,7 1.518,3

Cost of Equity 7,82% 7,82% 7,82% 7,82% 7,82% 7,82%Discount factor 100% 92,7% 86,0% 79,8% 74,0% 68,6%Discounted FCFF 0 1068,7 1113,1 1089,0 1065,4 1042,1

NPV 5.378


What are the value drivers?

CD&R already pushed capital structure and leverage to the limit

Significantly lower WACC is very unrealistic

Lower WACC

CD&R included conservative cost cutting projections Still quite some leeway for further improvements Most realistic value driver

Less Costs

Projections already include revenue growth forecast No rational reason for Hertz to outperform the

market Revenue growth above market highly speculative

More Revenues

RAC and equipment rental are businesses with short cash cycles

Thus timing of cash flows is no lever for value

Timing of Cash Flows


Improving Hertz Operations

HERTZ

US RAC On-airport Operating Expenses

US RAC Off-airport strategy

European OpEx & SG&A

US RAC Fleet Costs

US RAC Non-Fleet CapEx

HERC ROIC


Further savings potential

1. Further Savings Potential2006 2007 2008 2009 2010

Priced in 243,0 243,0 243,0 243,0 243,0On-Airport OpEx 75,0 75,0 75,0 75,0 75,0Off-Airport 58,0 58,0 58,0 58,0 58,0Europe 33,0 33,0 33,0 33,0 33,0Non-Fleet CapEx 57,0 57,0 57,0 57,0 57,0HERC 20,0 20,0 20,0 20,0 20,0

Projected 411,5 411,5 411,5 411,5 411,5On-Airport OpEx 89,7 89,7 89,7 89,7 89,7Off-Airport 100,0 100,0 100,0 100,0 100,0Europe 100,0 100,0 100,0 100,0 100,0Non-Fleet CapEx 90,0 90,0 90,0 90,0 90,0HERC 31,8 31,8 31,8 31,8 31,8

Mean 327,2 327,2 327,2 327,2 327,2

(Projected-Priced) 168,5 168,5 168,5 168,5 168,5(Projected-Mean) 84,2 84,2 84,2 84,2 84,2


Modified valuation

By including higher cost savings into the projections, we arrive at a valuation that is $278 mln higher...

Free Cash Flow & NPV Calculation with higher projected savings2005 2006 2007 2008 2009 2010

Corporate EBITDA 1.019,0 1.322,6 1.395,7 1.472,8 1.553,9 1.639,5Net Non-Fleet CapEx 0,0 61,9 14,8 15,4 16,0 16,7Delta NWC 14,8 75,9 18,3 19,3 20,3 21,4Delta Others 2,0 9,1 2,2 2,3 2,4 2,6

FCFF 1.006,3 1.193,8 1.364,9 1.440,4 1.520,0 1.604,0

Cost of Equity 7,82% 7,82% 7,82% 7,82% 7,82% 7,82%Discount factor 100% 92,7% 86,0% 79,8% 74,0% 68,6%Discounted FCFF 0 1107,3 1174,1 1149,3 1124,9 1100,9

NPV 5.656


Conclusion

We think...

...that a valuation of $5,6 bln can be justified

...CD&R should go ahead with the deal

History proves us right...


Thank you for your attention!

Any questions?

Case Study Hertz Corporation

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