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Arbs still eye Hertz, Dollar Thrifty tie-up

by Scott Stuart | Published November 2, 2011 at 9:06 AM

Shares of Dollar Thrifty Automotive Group Inc. dropped Tuesday with the broader equity market although the economy car rental company reported earnings at the high end of expectations and Hertz Global Holdings Inc. remains interested in a merger.

Dollar Thrifty reported on Tuesday third-quarter income of $66.6 million, or $2.13 per share, compared with $49.2 million, or $1.62 per share, for the same period last year.

According to Reuters, analysts were looking for average earnings of $1.92 per share and, on the high end of estimates, $2.16 per share. Dollar Thrifty's Ebitda increased about 25%, to $117.6 million, for the third quarter after adding back the merger-related expenses incurred in the third quarter of 2010 in the long-running takeover situation.

Analysts have had a price target for Dollar Thrifty between $70 and $85 per share.

Dollar Thrifty shares dropped as much as $3.12, or 5%, to $57.92 before recovering some of that loss.

Hertz's proposed exchange offer, which was allowed to lapse last week, valued Dollar Thrifty shares at $57.60 in cash and 0.8546 of a Hertz share for each Dollar Thrifty share, worth about $67.20 Tuesday, or $1.9 billion. Even without a bump that bid, at a $7.24 spread, offered a gross return of 12%.

Some risk arbitrageurs think a negotiated deal could end up with a price tag between $75 and $80 per Dollar Thrifty share.

Hertz said Oct. 27 that it was withdrawing its exchange offer in light of current market conditions and Dollar Thrifty's plan to commence a share repurchase program. The bidder said it still thinks the deal has merit and Hertz remains engaged with the Federal Trade Commission to obtain antitrust clearance, after which it will reassess the price and other terms of its proposal.

Dollar Thrifty intends to spend $100 million in share repurchases beginning Nov. 7.

On its earnings conference call, Dollar Thrifty said it has attempted to keep interested parties informed as it has navigated complex issues.

Some arbs view Hertz's backing off from its exchange offer as a tactical move in the face of a protracted antitrust review. Hertz has been selling its Advantage economy car rental business and ancillary airport retail assets to gain FTC approval. Reportedly, Penske Automotive Group Inc. was in a bidding process for Advantage that became troubled over price.

The exchange offer as structured was never going to be successful and a deal will end up being negotiated with Dollar Thrifty, so the lack of the offer is not significant, an arb said. That Hertz is still pushing on the antitrust front when it has no contractual obligation to do so is a bullish sign, another arb said.

There are still open issues with the antitrust review that extend beyond vetting a buyer of Advantage, but Hertz remains committed to resolving the FTC process, a source said.

Hertz is scheduled to announce earnings after market close Tuesday and will hold a conference call at 10 a.m. Wednesday.

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Arbs still eye Hertz, Dollar Thrifty tie-up

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