Will Hertz Shareholders Suffer From Post-Spinoff Remorse a la Expedia?
Leading car rental companies Hertz and Avis Budget Group survived the unprecedented spate of consolidations in the industry that we witnessed last year. The other big player in the space is privately held Enterprise Rent-A-Car.
Hertz plans to separate its equipment rental segment from its core car rental segment. The car rental company will maintain the old company name, while the new unit will be known as Hertz Equipment Rental. Hertz will receive $2.5 billion cash from the spinoff.
Equipment rental is a bigger business for Hertz than many people might imagine. The segment finished fiscal 2013 with revenue of $1.54 billion, compared to $9.2 billion for the car rental arm. That's almost 17% of the revenue of the company's core business.
Generating massive shareholder value
The consensus from many studies is that spinoffs more often than not create substantial value for shareholders. A good case in point is the 2011 spinoff of TripAdvisor
Since the spinoff, both stocks have shot up admirably, but TripAdvisor shares have gained 222% compared to a 146% for Expedia' shares. As a result, TripAdvisor now commands a market cap about 30% bigger than that of its parent company. That big gap remains even after the recent market correction for TripAdvisor shares, which traded at a frothy valuation.
Another notable case is the spinoff of Fortune Brands Home & Security from Beam in 2011. Fortune Brands Home & Security shares have climbed at a much faster clip than Beam's shares since then.
But the Expedia-TripAdvisor spinoff looks more remarkable than the Beam-Fortune Brands split, because Beam remains considerably bigger than Fortune Brands and commands more than twice its market cap.
Of course, not all spinoffs are so gilt-edged. Lands' End was spun off from Sears Holdings early this month. But the shares have been selling off, falling 17% in the space of little more than a week. Still, it's still too early to start judging the Lands' End spinoff as a failure.
According to Credit Suisse analyst Gary Balter, the sell-off can partly be attributed to technical forces. Investors might have sold Sears' shares short and purchased Lands' End shares in when-issued trading to avoid being short the stock, which drove up its price. The buying demand for this group of investors ceased when Lands' End shares started trading, and perhaps a sizable group of Sears' investors also sold their Lands' Ends shares. The result: falling share price for Lands' End.
Hertz shares, along with those of Hertz Rental Equipment, might receive a similar pop once the two companies part ways.
Another key reason why Hertz shares might rise considerably can be pinned on valuation matters. Once the spinoff is effected, Hertz will be viewed as a pure-play car-rental company in the league of Avis. Here is how shares of the two companies are currently valued: