In August 2005, The Carlyle Group and its accomplices (Clayton, Dubilier & Rice, and Merrill Lynch Global Private Equity) must conclude the terms of an offer to buy the Hertz Corporation. The Ford Motor Company had put Hertz, a completely owned subsidiary, available to be purchased in April 2005, and in June 2005 Hertz entered a double track procedure, that would bring about its sales or an initial public offering (IPO). The case gives in-depth pro formaprojections related to the business that permit students to inspect the effects of the deals and transactions and approximate a figure and a proposed offer for Hertz. Students must take into account whether their offer gives a sufficient come back to the funders, can create a higher worth for Hertz than the potential of an IPO, and can over take the offer of a competitors bidding. The case is fitting for utilization in courses on corporate finance, private equity, or deal valuation. In light of the vast scope of problems that the case encompasses and presents, it can be utilized of as the capstone case or be part of a case competition. For teachers wishing to give students a review of the part and practices of private equity, we suggest joining the Hertz LBO case with its companion case, "Investing in Sponsor-Backed IPOs: The Case of Hertz" (UV1409). The Hertz IPO was declared in July 2006, only seven months after the LBO was finished. The two cases cover an extensive variety of issues that emerge through the span of entry and exit of private value speculations.
Projected Income Statement ($ millions)
Adjuested EBDITA Margin RAC, EBDITA Multiple, Adjuested EBDITA Margin HERC
Projected Balance Sheet ($ millions)
Projected Cash Flows to Operating Company ($ millions)
Comparable Company Analysis ($ millions)Stock Price (8/15/05), Equity Value, Enterprise Value (EV) (2), RevenueEBITDA,EBITDA Margin
BIDDING FOR HERTZ: LEVERAGED BUYOUT( in Million Dollars)
RAC Operating Company, RAC Fleet, Total RAC Segment Value, HERC Segment Value, Total Value, equity value, Return on $2.3 billion,
MArket Required rate of return
D/E , Beta unlevered, Risk free rate, Tax rate, Beta Levered, Equity premium , Required rate of return , Value of Hertz
How does the dual-track process used by Ford to initiate “consideration of strategic alternatives” affect the bidding process for Hertz?
In what ways does Hertz conform or not conform to the definition of an “ideal LBO target”? Do you believe Hertz is an appropriate buyout target?
Strategically, what value-creating opportunities can the sponsors exploit in this transaction?
How realistic are the key assumptions that underlie the Bidding Group’s projections in case Exhibits 8, 9, and 10? Which assumptions are most likely to have the largest impact on returns?[FINS5538 – Takeover, Restructuring and Corporate Governance] 13
Based on the base-case estimates in case Exhibits 8, 9, and 10 and your estimate(s) of terminal value if the sponsors put up $2.3 billion in equity, what return can they expect to earn?
If Carlyle desires a 20% target return on its equity investment, does your analysis suggest that $2.3 billion is too much to pay, or can it afford to pay more—in either case, by how much?
What is the market-required rate of return for this investment, and why might this differ from the sponsors’ target return?
What is the value of Hertz using the equity residual method of valuation?
Assess the amount Ford is likely to receive if it pursues its IPO alternative versus being bought by a private equity group.
What factors would be considered in assessing whether the consortium’s bid is likely to beat that of a rival group?