Bankruptcies usually mean that the equity holders get wiped out. Hertz Global Holdings is proving to be an extraordinary exception.
Flush times in the rental car business led to a bidding war for the company in bankruptcy court. Result: Creditors are getting paid in full, and shareholders can actually expect a meaningful payout.
Shares of Hertz (ticker: HTZGQ) have risen more than 50%, to $6, after an investor group led by Knighthead Capital Management, Certares Opportunities, and funds run by Apollo Global Management (APO) won an auction last month for the company that will probably see Hertz exiting chapter 11 by the end of June. Hertz stock could see additional gains because the company is valued at a discount to rival Avis Budget Group (CAR), whose shares are up more than 100% this year, to $85.
Avis’ market value is $6 billion. A similar-size Hertz, with a projected net debt of $1 billion or less, will emerge from bankruptcy with a better balance sheet than Avis, which has about $3 billion in debt.
Rental car companies are set to prosper this summer—and beyond—as a vehicle shortage buoys pricing. Higher used-car prices mean less depreciation when the rental companies sell their cars. The industry should benefit as an oligopoly dominated by Hertz—which also owns the Dollar and Thrifty brands—Avis Budget, and the private Enterprise.
Hertz equity holders will get a package consisting of about $1.50 a share in cash, a 3% stake in the reorganized company, and warrants for 18% of the company with a rare 30-year maturity. The warrants account for the bulk of the value. The long maturity—most warrants are 10 years or less—should make them valuable once they begin trading.
Hertz’s financial advisors have valued the package at $7.36 a share, but it could ultimately be worth more.
“The complexity around the bankruptcy and its emergence has created an opportunity for current and prospective shareholders,” says Andy Taylor, a managing director at Carronade Capital, a Darien, Conn., investment firm that has been actively involved throughout the restructuring. “If reorganized Hertz closes the valuation gap to Avis, holders of HTZGQ should realize $10 or more.”
Hertz investors can take comfort that the Knighthead/Certares investor group is investing about $3 billion to buy new equity in Hertz.
Investors keen on the rental car business have focused on Avis because many can’t or don’t want to hold shares of a company in bankruptcy. That should change when Hertz emerges with a potential equity value of about $6.5 billion.
Write to Andrew Bary at [email protected]
