Hertz shares will trade on Nasdaq next week.
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Hertz Global Holdings
‘ equity offering set for Monday could lift the price of the company’s warrants that have traded cheaply in recent months relative to the stock.
Hertz shares (ticker: HTZZ) were up $1.59, or 4.9%, to $34.21 in early trading on Friday, while the warrants gained $1.27, or 6.7%, to $20.28.
The warrants (HTZZW) trade at close to parity, with the stock given an exercise price of $13.80 per share. Their intrinsic value, calculated by subtracting the exercise price from the stock price, is $20.41 ($34.21 minus $13.80).
The warrants are now statistically inexpensive given a long 30-year maturity. Investors might normally pay a premium of a few dollars above intrinsic value for the warrants. Assuming a stock price of $34 and annualized volatility in Hertz stock of 20%, the warrants would be worth more than $24 each. There are 89 million warrants outstanding.
A major factor depressing the warrant price has been the thin public float in Hertz shares that has made shorting the stock very difficult.
As a result, arbitragers haven’t been able to buy the warrants and short the stock. That could change with greater liquidity following the equity offering next week and the shift in the Hertz listing from the Pink Sheets to the Nasdaq, where the stock will trade under the ticker HTZ. There also should be options trading soon after equity offering and the Nasdaq listing.
The options will offer traders another way to hedge a long position in the Hertz warrants. Barron’s has written favorably on the warrants as a way for investors to play Hertz.
Since Hertz emerged from bankruptcy on June 30, the publicly available float in its stock has only been about 3% of its total shares outstanding, or roughly 14 million shares. The rest of the shares—totaling about 459 million—was bought mostly by institutions as part of Hertz’s restructuring and has been subject to trading restrictions under Rule 144.
In its coming equity deal, Hertz plans to offer 37.1 million shares in a range of $25 to $29 in what it has called its “re-IPO.” That will add to the public float even though the company plans to buy $250 million to $500 million of the deal. All the stock is being sold by existing shareholders, with none by the company.
More stock will free up in late December on the six-month anniversary of Hertz’s re-emergence from bankruptcy.
The warrants, while inexpensive to Hertz stock in recent months, have been valued in part relative to the institutional trading in the restricted shares, which has been at a discount to the public market. Lately, that market has been around $25 a share. The public/private market price gap should start to close with the equity deal and then as more stock frees up later this year.
Hertz has been talking with institutional investors in recent days, and there is speculation that the equity offering should go well and potentially price above the top end of the range.
Results at both Hertz and rival Avis Budget Group
(CAR) have been strong with Avis stock soaring 60%, to $281, after its blowout third-quarter results earlier this week after touching a high of $545 on Tuesday. The shares were up 3.4% Friday.
Hertz reported record results for the third quarter, including earnings before interest, taxes, depreciation, and amortization (Ebitda) of $860 million. The company projected $2 billion to $2.1 billion of Ebitda for 2021, compared with $649 million in 2019.
On the roadshow, the company has emphasized structural improvements to the business that should result in much higher annual Ebitda than in 2019 even if robust current conditions in the rental-car market—high pricing and high used-car prices—start to ease.
Hertz has a strong balance sheet with net cash of $1.2 billion, excluding asset-backed securities. Underscoring its financial health, Hertz said in the prospectus that it planned to make an offer by year-end to purchase $1.5 billion of 9% preferred stock held largely by funds run by Apollo Global Management (APO). That preferred can be redeemed at a 30% premium.
There also is talk that Hertz may soon make a public debt offering that could be used in part to purchase the preferred. That in turn would free up Hertz to do more aggressive share buybacks. It is now limited to $500 million of buybacks in the next year based on the preferred terms.
Write to Andrew Bary at [email protected]
