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Transcript
BREAKING NEWS: HERTZ IPO
$15.00
Friday, July 14th 2006
Vol XCIII, No. 311
Why pursue IPO for Hertz at this time?
Pros and Cons of Sponsor Backed IPOs
July 14, 2006
Positive:
- Pay the borrowing outstanding and also the additional dividend
- Demand of fund:
- Cash return for sponsors.
- IPO cited hertz`s strong brand equity and premier pricing power.
- Favorable IPO Market in 2006.
- Good return for public investors for RLBOs.
- Ownership exit, boarder investor base.
Negative:
- “strip and flip”
- Special dividend, short leverage buyout period—negative signal.
Pros:
- Incentives to improve operations and efficiencies that aimed for long term benefits
- Full discretion over management and operations without worrying about creditors
- Exit strategy for private equity investors
- Better performance than typical IPOs
Cons:
- Underperform once listed due to underscore of performance
- High risk involved if market timing is inaccurate
Difference between Conventional IPO and IPO from LBO
Reverse leverage buyout vs. Quick flips
- Empirically RLBOs have outperformed other IPOs.
- The most successful performances were associated with larger RLBOs
- Quick flips = Private equity sells of its stake within 1 year of IPO
- Have underperformed the index by 5% in the following 3 years
Leverage buyout IPO
- An initial public offering = the first sale of stock by a company to the public.
- Private equity firms mostly acquire majority stake in the investee company via a leveraged transaction
- After years of improvement, the company uses its expertise to increase efficiency
- Private equity firm exit their investment from a company through various routes out of which most prominent is IPO
a third of the value was simply a result of “market-related timing
Mr. Frissora CEO of Hertz
Additional debt for dividend?
Hertz Analysis
Hertz's IPO
Yes or No?
Data and Statistics
The Nature
- 1 billion dividend
- A special dividend during IPO of 425 million
- Total cash recovered = 1.425 billion
- Initial outlay = 2.3 billion
- IRR = 62%
- Background: dividend recapitalization had been popular among firms until the GFC
- Purpose: extract cash from the company to benefit their investors
- Acceleration of the IRR
- Tax shield benefit from issuing debt
- Partial liquidity without losing control
- Right after the IPO, three firms still retained 72% of the company
- A year later, the firms sold another 17% in the secondary market which left them 55%
- The sponsors argue that this is no quick “strip and flip”
- Demonstrated by the shareholding
Gross return on 2.3 Billion Investment
Drawbacks
The Second Dividend
4 Steps
The Leverage
Assumptions
- Pre-dividend debt to asset ratio = 67.36%
- Debt to EBITA = 10.97 (industry = 5.59)
- Credit rating downgrade
- Reduces financial flexibility
- Make the IPO seems like a quick flip to the investor
1. The first cash dividend paid in June 2006 $991,400,000
2. The second special dividend paid following completion of the IPO
3. Capital gains of shares owned by sponsors
4. Profits from cash received after exercise of over allotment options
Sources of gain
Summary on Gross Return
Attractive Investment?
Sponsor holding
Gain on holding
$15 offer price?
Price Stimulation
Looking ahead
Investment Advice
Fair or overpriced?
Should you buy their shares?
Stock price history since IPO
Risk Vs Return
Buy:
- The company looks attractive, high growth potential
- Diversification
Not buy:
- Based on calculation the value is lower than IPO
- Pay the dividend right before the IPO
- How much value can be added for such short holding period
Lastly it depends on your risk appetite!