Hertz Global Holdings (HTZ.N) agreed to buy rival Dollar Thrifty Automotive Group DTG.N for about $2.56 billion in a deal that puts the combined company's share of the U.S. car rental market at around 25 percent.
The merger ends more than two years of on-off takeover talks for Dollar Thrifty involving Hertz, the second-largest U.S. car rental company, and third-ranked Avis Group Inc (CAR.O).
With the long coveted acquisition of fourth-ranked Dollar Thrifty, Hertz would further cement its lead over Avis while narrowing the gap with market leader Enterprise Holdings, which owns Enterprise along with the Alamo and National brands.
Around 95 percent of the U.S. car rental market will be controlled by these three companies, following the deal.
Hertz shares jumped 11 percent to $14.65 on the New York Stock Exchange while Dollar Thrifty shares traded up 7 percent at $87.04, just below the offer price of $87.50.
In a sign that investors welcomed consolidation of the industry, Avis shares also rose 4 percent to $16.63.
The Hertz offer was at a premium of 8 percent to Dollar Thrifty's Friday closing price of $81 on the New York Stock Exchange and almost double a $1.2 billion offer Hertz made in April 2010.
Based on Dollar Thrifty's net cash position of $285 million, the deal has an enterprise value of $2.3 billion, the companies said.
Past takeover talks were stalled in part by price and in part by uncertainty over the companies' ability to win antitrust approval of a merger. Hertz expressed confidence that it would win antitrust approval by mid-October with a plan to sell its discount brand Advantage.
Park Ridge, New Jersey-based Hertz also said it has agreed to sell Advantage, which caters to the same market as Dollar Thrifty, to Franchise Services of North America (FSN.V) and Macquarie Capital.
Underscoring the level of confidence by both companies that the deal will clinch regulatory blessing, neither break-up fees nor reverse break-up fees are payable if the transaction fails, people familiar with the matter said.
Hertz CEO Mark Frissora said his firm had seen rising competition in the last 12 months.
"We are going to go from having 17-18 percent share of the total market to 24 percent. There is still 20-30 percent of the market that'll still be controlled by regional players," Frissora told Reuters, referring to the U.S. airport rental market share.
"We are pleased to have finally reached an agreement with Dollar Thrifty after a lengthy — but worthwhile — pursuit," he said earlier in a statement. "We have always believed that a combination with Dollar Thrifty is the best strategic option for both companies."
Hertz was always seen the more likely to win regulatory clearance for a merger than Avis because it serves the high-end rental market. Avis owns the lower-price brand Budget.
John Briggs, an antitrust expert at Axinn, Veltrop & Harkrider LLP, said U.S. regulators will likely approve the deal, although they may have qualms because Hertz is getting rid of a poor low-price brand to buy a better rival.
Hertz expects the transaction to be accretive to its diluted net earnings per share in the first year and generate at least $160 million of annual cost savings.
ANOTHER BIDDING WAR UNLIKELY
Hertz had previously offered to buy Dollar Thrifty in cash and stock. The company's significantly improved balance sheet in recent years has allowed it to make an all-cash offer this time around, people familiar with the matter said.
Hertz has lined up a $1.95 billion bridge financing facility to support the transaction from Barclays (BARC.L), Bank of America Merrill Lynch (BAC.N) and Deutsche Bank (DBKGn.DE), according to one of these people.
Dollar Thrifty is allowed to solicit a superior proposal for 30 days, according to the people. But analysts played down the prospect of another round in the takeover wrangling.
Avis' entry into the bidding in 2010 pushed up the price for the perennial takeover target, which at one point during the financial crisis was offered $2 per share by Hertz.
Avis withdrew its offer after it bought Avis Europe last year for about $1 billion.
"We do not believe (Avis) will re-enter the process given the outstanding offer," MKM Partners analyst Christopher Agnew said in a note to clients.
Several top Dollar Thrifty shareholders told Reuters last week they would likely accept a takeover offer from Hertz that valued the company at more than $87 per share.
"Hertz has made a compelling offer to our stockholders that reflects the strength of our business," Dollar Thrifty Chief Executive Scott Thompson said in a statement.
However one top shareholder, who declined to be identified, on Monday said the purchase price was disappointing and the offer price should have been $90 per share or above.
Dollar Thrifty, the final big target in an industry that has consolidated rapidly, this month urged Hertz to make a compelling offer or leave it alone.
Frissora said there would be job cuts after the deal but he would work to limit redundancies.
Lazard Ltd (LAZ.N), Barclays, Bank of America Merrill Lynch and Deutsche Bank are acting as financial advisors to Hertz. Barclays will also serve as dealer manager for the cash tender offer.
JPMorgan Chase & Co (JPM.N) and Goldman Sachs Group (GS.N) advised Dollar Thrifty.
(Additional reporting by Sakthi Prasad in Bangalore and Diane Bartz in Washington, Editing by Rodney Joyce, David Gregorio and Andrew Hay)
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