The Hertz Corporation

Private Equity
Session 3
Source: Case The Hertz Corporation

2013 Viney Sawhney

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The Hertz Corporation

Transaction Structure

2013 Viney Sawhney

The Hertz Corporation

Clayton, Dubilier & Rice Inc
Private equity investment firm founded in 1978 Investments in 39 US and European businesses Has achieved attractive returns on investments

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The Hertz Corporation

First Stage: Uninteresting Bid
Year 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 Hertzs rental fleet in association with Lehman Brothers and Deutsche Bank

Year 2003
CD&R convinced that Hertzs 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 Hertzs CEO

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The Hertz Corporation

Second Stage: Ford agrees to sell
Year 2005

Early 2005 Fords US auto business showing signs of weakness In-cashing Hertz investment becomes a priority
For strengthening Fords balance sheet

Fords 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 Hertzs operations
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The Hertz Corporation

Rationalizing and Optimizing Hertzs Operations
Airport operating expenses Rental fleet costs

Non-airport strategy European OpEx and SG&A

Hertz

Non-fleet rental CapEx HERC ROI

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The Hertz Corporation

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?

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The Hertz Corporation

Proposed Corporate Structure

The Hertz Corporation

Domestic Subsidiaries

HERC

Hertz Vehicle Financing

Hertz International

Operating Company
Operating Company owns residual Hertzs assets Carries out all rental business with customers Leases fleet from Fleet Company and provides equity

Fleet Company
SPV entities provide enhanced securitization for asset backed fund raising Leasing-related cash flow from Operating Company covers debt amortization

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The Hertz Corporation

Goals of the New Capital Structure
Stability Flexibility Liquidity Lower Costs

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The Hertz Corporation

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The Hertz Corporation

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The Hertz Corporation

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The Hertz Corporation

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 HERCs fleet (on OpCos balance sheet rather than FleetCos). 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.
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The Hertz Corporation

Capitalized Value of Annual Operating Improvements
Source of Value 1 US On-Airport operating expenses 2 US Off-Airport rationalization 3 European expenses Subtotal Tax @ 36% After tax 4 US Non-Fleet CapEx 5 HERC ROIC improvement TOTAL Expected Total 163 100 167 430 155 275 90 32 397 Investment Case Only Exhibits 2A & 2B 75 Case page 6 58 33 Exhibits 3A & 3B 166 60 106 56 32 194 $2,775 $1,619
Case page 7 Case page 7

Capitalized @ 10% with 3% perpetual growth $5,674 Capitalized @ 15% with 3% perpetual growth $3,310

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The Hertz Corporation

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

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The Hertz Corporation

Sample ECF Valuation of Hertz Equity at Buy-Out Date

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The Hertz Corporation

Estimated IRR of LBO Sponsors 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

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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

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The Hertz Corporation (B)

ABS Financing:
What happened?

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The Hertz Corporation (B)

ABS Financing
So how did they fill the funding hole?

Transaction closed December 21st, 2005 Several 2005 Deal of the Year Awards
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The Hertz Corporation (B)

Subsequent Events

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The Hertz Corporation (B)

Subsequent Events (continued)

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The Hertz Corporation

Hertz Stock Prices

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