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Apr 26

Dollar Thrifty shows the value of deleveraging

Posted by mcole in premiumsmergers and acquisitionsleverageDealscost cutting


Hertz Global Holding's $1.2 billion deal for Dollar Thrifty shows that cleaning up a corporate balance sheet can pay off. But finance executives who go to the trouble in hopes shareholders will be rewarded by an acquirer shouldn't count on a big premium.

The new executive team at car renter Dollar Thrifty spent the last year strengthening the company's balance sheet after Scott Thompson joined as chief executive in the fall of 2008 and began a turnaround effort.

Under Thompson, Dollar Thrifty shrunk its fleet by 14 percent, which allowed for better pricing power and lower car costs, in turn bulking up earnings. The company also cut more than $240 million in costs and deleveraged the company's balance sheet.

That has made the stock one of the best performers of the past year, as it is up 52 percent in 2010 alone. The shares traded at less than $1 in March 2009.

"Mr. Thompson successfully navigated a tumultuous 2009 and has set the company up for additional improvements as the economy recovers," Goldman Sachs analysts wrote in a note published last week.

Meanwhile, the rental car industry has been undergoing consolidation, so analysts reckoned Dollar Thrifty was a good candidate to be the next target. The Goldman analysts observed also last week that Dollar Thrifty was the smallest of the four major rental companies and had two valuable brands and a net cash position.

Hertz's offer of $41 a share represents a 5.5 percent premium based on the stock price's Friday close of $38.85.

Yet that's less than it could have been, considering analysts valued the company at more than $47 last week.

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