Hertz Lbo
1. How much value do you expect to be created by operating improvements and capital structure changes envisioned by CD&R?
CD&R proposed changes to the following areas.
a. US RAC on-airport operating expenses: Labor per transaction, administrative and other costs had increased 41%, 65% and 30% respectively between 2000 and 2005. In addition, margins were not constant across locations and varied from 32% to -7%. CD&R proposed that the operating expenses could be reduced resulting in cost savings of $75M per year.
b. US RAC off-airport strategy: Hertz’s plan for expansion in off-airport locations had not generated the profit commensurate with the capital required to support it. Further, profit margins varied from 55% to -200% across off-airport locations. CD&R proposed that potential savings of $58M per year could be realized from this source.
c. European operating and SG&A: Hertz’s European SG&A expenses as a percent of revenue were nearly three times higher than those in the US. CD&R proposed that efficiencies from this source would be $33M per year.
d. US RAC fleet costs: Hertz had higher fleet costs as compared to its competition. However, this advantage that the competition held over Hertz was expected to go away soon, which would result in a more level playing field.
e. US RAC Nonfleet capital expenditures: Hertz spent more on capital expenses than its competitors. Reducing this to comparable levels with Avis would result in savings of $57M per year.
f. HERC ROIC: Aligning manager’s incentives to focus on ROIC was expected to result in significant savings, to the order of $32M per year.
In total, CD&R was expecting to create approximately $255M per year. Conservatively, we would expect that CD&R would realize 50% of its projections, which amounts to approximately $127M per year.
2. How would you explain the proposed transaction structure developed by CD&R and its partners? Specifically, does it help or hinder the realization of the anticipated
CD&R proposed changes to the following areas.
a. US RAC on-airport operating expenses: Labor per transaction, administrative and other costs had increased 41%, 65% and 30% respectively between 2000 and 2005. In addition, margins were not constant across locations and varied from 32% to -7%. CD&R proposed that the operating expenses could be reduced resulting in cost savings of $75M per year.
b. US RAC off-airport strategy: Hertz’s plan for expansion in off-airport locations had not generated the profit commensurate with the capital required to support it. Further, profit margins varied from 55% to -200% across off-airport locations. CD&R proposed that potential savings of $58M per year could be realized from this source.
c. European operating and SG&A: Hertz’s European SG&A expenses as a percent of revenue were nearly three times higher than those in the US. CD&R proposed that efficiencies from this source would be $33M per year.
d. US RAC fleet costs: Hertz had higher fleet costs as compared to its competition. However, this advantage that the competition held over Hertz was expected to go away soon, which would result in a more level playing field.
e. US RAC Nonfleet capital expenditures: Hertz spent more on capital expenses than its competitors. Reducing this to comparable levels with Avis would result in savings of $57M per year.
f. HERC ROIC: Aligning manager’s incentives to focus on ROIC was expected to result in significant savings, to the order of $32M per year.
In total, CD&R was expecting to create approximately $255M per year. Conservatively, we would expect that CD&R would realize 50% of its projections, which amounts to approximately $127M per year.
2. How would you explain the proposed transaction structure developed by CD&R and its partners? Specifically, does it help or hinder the realization of the anticipated