Hertz group had initiated an IPO in July 2006 when Carlyle group, together with Clayton, Dubilier &Rice, and Merril Lynch Global Private equity , three prominent firms had filed to take the firm public. However this action has come just seven months after the three had combined to purchase Hertz from Ford Motor Company for Approx. $15 million. Berg, MD of Vandelay Capital Management debated whether to invest in this IPO.The LBO sponsors had borrowed an additional $1 billion on top of the buyout financing to pay themselves a special dividend in June 2006 , being the biggest reason why the IPO generated widespread criticism along with the speed with which the IPO was ...view middle of the document...
1% and the Dow Jones Index up by 12.9%. Furthermore, the recent trend in IPO deals had also been good with 60% of companies trading above their offer price with average returns of 11.4% just four weeks after. Trends (Exhibit 8 of case) showed that as of 14th November 2006, 198 IPOs had price raising approximately $41 billion , the pricing of the IPOs being solid.
However, coming down to the more skeptical reasons why the PE partners went Public on July 14th, 2006 just seven months after an LBO ,it can be said that perhaps the equity partners had overestimated the value creation associated with Hertz and after not seeing the desired value creation decided to go public. Moreover , the high financial leverage , $6 billion in September 2006, was a deterrent in any form of Private Equity value creation. Extreme critics would argue that the IPO happened soon after an LBO as the partners got what the wanted i.e personal returns , by paying themselves a $1 billion special dividend, and now saw no more interest in Hertz.
Sponsors’ Bad move?
Whatever the reasons for the IPO, it was dealt with great public and media skeptism due to the sponsors’ actions of paying themselves a special dividend of $1billion, $4.32 per share, from pre-IPO debt borrowed in June 2006 . Furthermore, the net proceeds of the IPO which were approx. $1,425 million were used to repay Hertz Holding loan facility and the balance would be used to pay out a second special dividend to Sponsors who made up 99% of common shareholders . This caused damage to Hertz’s market reputation among potential investors, which in return shed a negative light on the company’s future market standing. The sponsor’s actions caused a media spur as they were termed by Business Week as being ‘hungry for cash’. In short , the actions were as detrimental as to make market spectators believe the LBO was carried out for selfish reasons and this can be reflected in the demand for the Hertz IPO weakening and the offer price lowering from a range to $16-$18 to $15. It added to the doubts over how the sponsors could have achieved meaningful management and value creation improvements at Hertz in just a span of 7 months after the LBO .
Furthermore, it should be noted that the debt caused the cash flows to obtain a RAC operations value that had to be adjusted to reflect asset backed financing in a bankruptcy –remote special purpose vehicles (SPV). Due to this, the Returns to investors fell due to interest and depreciation arising owing to SPV .Moreover, the competitor market such as Dollar Thrifty had no corporate debt suggesting that in an economic downturn, the sponsors’ actions might cause Hertz limited financial flexibility.
Sponsor backed IPOs
The $14 billion buyout of Hertz by trio Clayton, Dubilier &Rice,Carlyle Group and Merrill Lynch followed by a sponsor-backed IPO had its pros and cons. All companies listed in 2007 , whether private equity-backed or not, registered an average drop in their...