Session 3 Part 2 Case the Hertz Corporation

The Hertz Corporation

Private Equity

Session 3

Source: Case The Hertz Corporation

© 2013 Viney Sawhney

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Transaction Structure

© 2013 Viney Sawhney 2


Clayton, Dubilier & Rice Inc

� Private equity investment firm founded in 1978

� Investments in 39 US and European businesses

� Has achieved attractive returns on investments



First Stage: Uninteresting BidYear 2002

• CD&R commenced studying the rental car business (RAC)

• Early in its investigation, CD&R evaluated Budget and Alamo.

• Hertz is much better target • Ford showed no interest in the

proposal and unfeasible • CD&R financing challenge• Putting together an acceptable

security structure for lenders using Hertz‘s rental fleet in association with Lehman Brothers and Deutsche Bank

Year 2003

• CD&R convinced that Hertz‘s capital structure was not attractive

• New visit to Ford - the deal capable of being financed

• Hertz was non-strategic to Ford

• Ford executives not impressed as well as Hertz‘s CEO



Second Stage: Ford agrees to sellYear 2005

• Early 2005• Ford’s US auto business showing signs of weakness• In-cashing Hertz investment becomes a priority

• For strengthening Ford’s balance sheet

• Ford’s investment bankers suggest two-track approaches:• IPO filings completed in June• Ford invites bids from potential private equity investors by July for

sale of Hertz

• Ford makes full revelations in regard to financing and operating information for the benefit of investors

• Hertz executives initiate meetings with potential buyers to provide additional information

• After due diligence, CD&R formulates specific measures / plans to optimize Hertz’s operations



Rationalizing and Optimizing Hertz’s Operations

Hertz

Airport operating expenses

Non-airport strategy

European OpEx and SG&A

Rental fleet costs

Non-fleet rental CapEx

HERC ROI



Deal Structure Objectives

� Can the rental fleet be used as a security for raising financing?

� Can asset-backed security structure be used to raise funds?

� How can fund providers be assured of debt amortization and security?



Proposed Corporate Structure

Domestic Subsidiaries

Operating Company• Operating Company owns

residual Hertz‘s assets

• Carries out all rental business with customers

• Leases fleet from Fleet Company and provides equity

HERC Hertz Vehicle Financing

Fleet Company• SPV entities provide

enhanced securitization for asset backed fund raising

• Leasing-related cash flow from Operating Company covers debt amortization

Hertz International




Goals of the New Capital Structure

• Stability

• Flexibility

• Liquidity

• Lower Costs









Notes.

1. Adjusted EBITDA (from Operating Projections) reflects the actual cash cost of RAC fleet interest and depreciation charges.

Fleet depreciation reflects the maintenance level of capex required to maintain the value of the fleet, without growth.

2. Net Fleet Equity Requirement represents the equity investment by OpCo required to support growth of the RAC Fleet

via additional ABS borrowing.

3. Net OpCo EBITDA is the sum of lines 1 and 2.

4. HERC Net Fleet Growth CapEx represents the increase in HERC’s fleet (on OpCo’s balance sheet rather than FleetCo’s).

Note that capital spending to maintain the fleet is already included in Adjusted EBITDA.

5. Non-Fleet CapEx reflects anticipated reductions described in the case.

6. Change in Working Capital reflects small reductions in net working capital over the period, driven by improvements

in receivables, payables, and accruals.

7. Change in Other Assets & Liabilities reflects cash flow benefits of the difference between recorded pension expense and

required cash contributions, as well as timing differences between the expensing and payment of insurance claims.

8. Pre-tax Unlevered Free Cash Flow is the sum of lines 3-7.

9. OpCo Cash Interest reflects a blended cash interest rate between 8% and 9%.

10. Cash Taxes include income tax savings due to implementation of a Like-Kind Exchange Program for the RAC fleet.

11. After-tax Levered Free Cash Flow equals the sum of lines 8-10.



Capitalized Value of Annual Operating Improvements

Expected InvestmentSource of Value Total Case Only

1 US On-Airport operating expenses 163 752 US Off-Airport rationalization 100 583 European expenses 167 33

Subtotal 430 166Tax @ 36% 155 60After tax 275 106

4 US Non-Fleet CapEx 90 565 HERC ROIC improvement 32 32TOTAL 397 194

Capitalized @ 10% with 3% perpetual growth $5,674 $2,775

Capitalized @ 15% with 3% perpetual growth $3,310 $1,619

Exhibits 2A & 2B

Case page 6

Exhibits 3A & 3B

Case page 7

Case page 7



Comparison of After-tax Free Cash Flow to Cash Flow Available



Sample ECF Valuation of Hertz Equity at Buy-Out Date



Estimated IRR of LBO Sponsor’s Equity at Buy-Out Date

Notes

Figures for the Terminal Value of Equity do not include dilution from management (or other) stock options

Including dilution due to stock options would reduce the value realized by CCM on exit accordingly, the estimated IRR for CCM


The Hertz Corporation (B)

Sources of Value Creation associated with ABS notes

� Higher debt capacity, more interest tax shields

� Lower cost (compared to next cheapest alternative)

� Arbitrage between insurance payments and bond spreads



ABS Financing:What happened?



ABS FinancingSo … how did they fill the funding hole?

• Transaction closed December 21st, 2005

• Several 2005 “Deal of the Year” Awards



Subsequent Events



Subsequent Events (continued)



Hertz Stock Prices


Documents

Session 3 Part 2 Case the Hertz Corporation