The bidding process for Hertz began when William Ford Jr. announced plans to explore “strategic alternatives” for Hertz in April 2005. Two months later in June, an S-1 registration statement was filed setting up a “dual track process” that would result in a Hertz IPO should other sale prospects fail. This decision affects the bidding process in multiple ways. For one there is less time for the two bidding groups to come up with a price and resulting agreement. They are forced to act quickly and find a price that the Hertz management will agree upon. If they don’t do this, then Hertz will just go through with the IPO. This could lead to a driven up price, since the bidding groups will do whatever it takes to win the bid.
Hertz is an
…show more content…
ABS debt was not only less expensive (it carried a low interest rate around 4.5%), but it provided a more flexible financing arrangement since debt could increase or decrease with fleet size. Also, senior debt and purchase price multiples had increased to 4x EBITDA and 8x EBITDA respectively. These numbers are used in coming up with a purchase price multiple, which is a key drive in finding the enterprise value.
When trying to find the Enterprise Value for Hertz, the sponsor group took a couple key assumptions. First off, management had projected transaction volume to grow 6.9% in 2005, which according to the case is one of the key drivers of the rental car business. This seems to be a reasonable assumption considering that travel was starting to rebound from the lows post 9/11. Also, the Bidding group believed $400-$600 million in annual EBITDA savings was attainable by 2009 (confirmed by external industry advisors). Hertz was behind in EBITDA margins, increasing operating expenses outpacing revenue growth, the off-airport growth strategy had significant losses, higher nonfleet capital expenditures, Europe’s RAC SG&A was 3 times higher than those in the U.S., and return on assets lagged competitors. The bidding group thought by targeting these problem areas, and others, they could generate higher profits. Another assumption
Interpretation: 53% of the total assets are financed through debts; the remaining 39% is financed through equity.
In April 1988, Dan Cohrs, vice president of project finance at the Marriott Corporation, was preparing his annual recommendations for the hurdle rates at each of the firm 's three divisions. Investment projects at Marriott were selected by discounting the appropriate cash flows by the appropriate hurdle rate for each division. In 1987, Marriott 's sales grew by 24% and its return on equity stood at 22%. Sales and earnings per share had doubled over the previous four years, and the operating strategy was aimed at continuing this trend. Marriott 's 1987 annual report stated: We intend to remain a premier growth company. This means
Creditors normally focus on the liquidity or solvency of the borrower in terms of current ratio and quick ratio, which indicate whether the company has enough working capital to cover the short-term debts. Myer will enter into a syndicated facility agreement to refinance the existing borrowings of the Myer Group. Besides, creditors are interested in the business risks the company might undertake, which indicate the possibility that the company might be unable to pay back the long-term liability in the future. From this point, the expectation on high return on investment and high profitability in the long run make the creditor’s interest aligned with shareholders’ value.
Overview: The Hertz buyout is one of the largest private equity deals. It drew criticism in the media and from union members, after the company’s new owners paid themselves $1.3 billion in dividends not long after the transaction closed and ultimately financed the payments by selling stock to the public. The company has realized hundreds of millions of dollars in improved financial results annually, but also has cut thousands of jobs as it has sought to make operations more efficient. Figure 7 provides an overview of the LBO transaction, including a time line of key events. Background: Hertz says it is the world’s largest general use car rental company, with approximately 8,100 locations in about 145
Managing debt levels to maintain an investment grade credit rating as well as operate with an efficient capital structure for its growth plans and industry
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
However, as discussed before, According to the Key Industrial Financial Ratio U.S. Industrial Long-Term Debt table, a company whose ratio is ranked as A has the long-term debt/capital ratio and Total debt/Capitalization of 33.9% and 42.5% respectively. Thus, 40% of the debt ratio was used for valuation model for Target
Taking the CAPM equation, we were able to figure out eh cost of equity and in its credit range
We assume linear increase in the EBIT and EBITDA at 3% for 1999 from 1998 figures. Considering the debt will be long-term, we test both 10- and 20-year corporate yields as interest rates to see what would be the coverage ratios, using the 1999 projected figures.
Our analysis attempts to answer the question, “What are the things a company must consider when analyzing a new investment or project?” According to the text, a firm’s first objective when deciding to take on new debt should be that its return on net assets (RONA) should be greater than its weighted average cost of capital (WACC). Since we are working with an income statement only and do not have an amount for net assets, we will instead use return on invested capital (ROIC), which measures how well a company is using its money to generate returns. Comparing a company 's return on capital (ROIC) with its cost of capital (WACC) reveals whether invested capital was used effectively. From our spreadsheet calculations we see that using our estimated operating profit provides us with a 19.9% return on invested capital with only a 7.2% weighted average cost for that same capital. If these numbers are even close to correct, George should definitely make the move.
The debt-to-capital ratio gives users an idea of a company's financial structure, or how it is financing its operations, along with some insight into its financial strength. The higher the debt-to-capital ratio, the more debt the company has compared to its equity. Star River has always depended much on debt for its financing and the trend shows this ratio may get higher in future. Star River, with high debt-to-capital ratios, compared to a general or industry average, may show weak financial strength because the cost of these debts may weigh on the company and
If the market value of a stock is lower than its intrinsic value, this stock is defined as “trades at a discount”. To figure out whether AGI stock is traded at a discount to comparable companies, as its management believed, we can simply apply multiple which comes from the average multiple of its comparable companies. Considering fluctuation of future after-tax earnings caused by the change in capital structure, we prefer to use TEV/EBITDA multiple in this case. Amtelecom Group consists of two lines of business which has to been taken into consideration. We separately calculate the value of both companies and their
The Debt-Equity Ratio shows that most of the capital was in terms of ordinary shares and is becoming more reliant on Shareholders Equity than on debt to finance operations.
The cost of debt (kd) rate of 13% was used after we assessed the key industrial financial ratios and compared them with that of Wrigley’s (See Appendix 2) to conclude that it was in the range between the BB rate of
After subtracting all economic costs from operating profits after taxes EVA reveals the true economic surplus available for further investment. Traditional cash flow analysis can easily disregard companies with negative cash flows because main purpose of traditional cash value metric is to control cash generation. In contrast, the main purpose of EVA is to optimize resource allocation. At difference to accounting measures, EVA highlights the gap in performance, and hence, aligns the interests of managers and shareholders. The link between shareholders value and economic profit of the company becomes more transparent. At difference to traditional accounting measures of corporate profit, EVA fully accounts for the company¡¦s overall capital costs. It includes both, the direct cost of debt capital and the indirect cost of equity capital. The cost of capital is the minimum return required to pay shareholder¡¦s equity . EVA can therefore determine whether or not the business is creating value but it can also indicate how much value is created at different business levels.