Hertz Corporation (A) Case Solution And Analysis, HBR Case Study Solution & Analysis of Harvard Case Studies

Considering leveraged buyout Hertz in 2005, the complex, high-profile deals, and a good example of best practice in private equity. First of two parts, the Hertz LBO, taking the point of view of Clayton, Dubilier & Rice, the leader of the consortium of private trading shares to buy Hertz from Ford in the auction. Set in the final round of the auction, a pressing issue for the consortium is how to raise your previous bet. Reasonable rates should be based on how many of the private equity consortium could create by improving global operations Hertz, on the one hand, and a more efficient capital structure, on the other. Presents detailed descriptive information on both topics, but does not include detailed financial projections, to be formulated by students or supplied for the purposes of discussion, the teacher. "Hide

by Timothy A. Luehrman, Douglas C. Scott Source: Harvard Business School 18 pages. Publication Date: October 19, 2007. Prod. #: 208030-PDF-ENG

Analysis:

The value of the Hertz Corporation calculated using discounted cash flow method is approximately $ 6.1 billion, whilst the final revised offer is $ 5.6 billion. The final offer of $ 5.6 billion is quite reasonable for the Hertz Corporation as it was considering that it would not be able to receive $ 5.4 billion earlier. The price is little lower than $ 6.1 billion but is quite reasonable.

The possible impact of synergies after making several changes had reduced the costs and increased the profitability of the company. This had increased the price or value of the company and thus increased to $ 6.1 billion.

The factors which will create the synergies are the restructuring the organization. They are considering to reduce the airport operating expenses by $ 75 million per year. They are also considering to reduce the cost by changing the airport strategy; changes in the airport strategy will save their $ 58 million. They have not only considered the changes in the U.S. only they have also focused to reduce the costs of international operations as well. So, the European expenses have reduced by $ 33 million. They have also made changes in the performance related payment of the managers, which has reduced their $ 159 million.

The value of the Hertz Corporation is calculated using the cash flows generated by the RAC and HERC, these are combined together and adjustments are made to arrive at the corporate EBITDA. In calculating the value of the Hertz Corporation the impact of the synergies has also considered. So, by considering the forecasted value of the Hertz Corporation, sponsor will need to raise further $ 700 million equity, This is because from $ 5.4 billion the value has increased to $ 6.1 billion, so this consist of $ 700 million additional amount which is required by sponsor to raise.

CCM must bid for the revised final offer made by the company, because by making the changes in the organization, it will reduce the cost and improve the profitability of the Hertz Corporation. Thus by considering these changes the value of the company has increased to $ 6.1 billion. So, it is better for CCM to accept the final bid of $ 5.6 billion to purchase the holding in Hertz Corporation.

The credit rating of the Hertz Corporation is BBB and it is expected that the credit rating will deteriorate further, because the credit rating of the Ford and GM had decreased and this may deteriorate their rating as well. But the acquiring entity is considering to increase the credit rating of the Hertz Corporation to AAA, so that they will be able to raise funds ABS financing.

CDR is considering two main factors to increase the credit rating of the Hertz Corporation. First, it is considering to issue equity which will increase the covenant of the Hertz Corporation and thus this will increase the credit rating of the company. Second, it is considering that the two entities the Ambac financial group and MBIA Inc. will issue the ABS securities by converting it into AAA rating and these entities will ensure the interest and principal payment. This will also increase the rating of the Hertz Corporation and thus they will be able to raise finance at lower interest rate.

Conclusion:

The CCM consortium is considering to acquire the Hertz Corporation. The bid to purchase the business earlier was $ 5.4 billion but after considering the potential the final revised offer was made of $ 5.6 billion. But in actual the value calculated using the discounted cash flow method is $ 6.1 billion which is higher than the revised bid. The CCM is in a good position to buy the Hertz Corporation at $ 5.6 billion but the problem is that they will be unable to raise finance because of the covenant and the credit rating. So, before the end of December they need to raise the amount, as the auction is scheduled to close at the end of December. They have taken certain necessary steps to ensure the purchase of the business. But they need to do it as quick as possible because of short of time.

Recommendation:

It is recommended that CCM should acquire the Hertz Corporation because they are selling it at $ 5.6 billion whilst the value calculated is $ 6.1 billion. Furthermore the Hertz Corporation will be able to generate more profit after they will make the changes they have considered. So,