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Announcement:

Moody's says a bidding war for Dollar-Thrifty could pose risks for the ultimate acquirer

Global Credit Research - 04 May 2010

New York, May 04, 2010 -- Moody's Investors Service said that today's statement by Avis Budget Car Rental LLC (Avis) that it would like to make a substantially higher offer to acquire Dollar Thrifty Automotive Group, Inc. (Dollar Thrifty) than the $1.3 billion offer announced by The Hertz Corporation (Hertz) does not have any immediate impact on the current ratings and outlooks of any of the companies: Avis (Corporate Family Rating -- B2/Positive), Hertz (CFR -- B1/Negative) and Dollar Thrifty (CFR - B3/Positive). Avis has not made a definitive offer for Dollar Thrifty, and Dollar Thrifty has not publicly responded to Avis' expression of interest. The existing merger agreement between Dollar and Hertz does allow Dollar to entertain alternative offers from other parties, but it also affords Hertz the right to counter such offers. Consequently, the ultimate price and financing structure of a winning bid for Dollar could be considerably different from that which had been agreed upon by Hertz and Dollar.

Moody's expects that the credit profiles of the companies in the US car rental sector will benefit from improving industry fundamental that will continue into 2011. These improving fundamentals include: greater discipline within the industry for maintaining prudent fleet size and new-vehicle purchasing levels; stable used car prices; an improving outlook for business and leisure travel; and, a growing recognition by rental companies that attempts to gain market share through price cutting generally yields minimal sustainable gains. This final development contributes to a more stable pricing environment. Importantly, Moody's expects that the acquisition of Dollar Thrifty by either Hertz or Avis would support this improving industry outlook and would result in an oligopoly consisting of Enterprise Holdings, Hertz and Avis. This three-player industry would compare with a sector that had included as many a seven competitors, many of whom regularly employed aggressive price cutting as a recurring component of their operating strategies.

The potential acquisition of Dollar Thrifty would provide either Hertz or Avis with important long-term strategic benefits. Each would gain additional fleet purchasing leverage with OEMs, each would be able to generate considerable operating synergies, and the acquirer would be the number-two player in a three-company industry. There are, however, some differences in each company's position with respect to the acquisition. Hertz currently has no material position in the value segment of the car rental space; the Dollar Thrifty acquisition would fill this gap in Hertz's service portfolio. Avis, in contrast, has a position in the value market through its Budget brand; consequently its strategic need for Dollar Thrifty is less than that of Hertz. However, because of its ownership of the value-oriented Budget, Avis's ability to integrate Dollar Thrifty and achieve some additional savings could be marginally greater than that of Hertz.

Moody's believes that building a stronger credit profile is an important objective of both Hertz and Avis given their heavy need to access the ABS and credit markets in order to fund their fleets. Consequently, each company would likely attempt to undertake any potential acquisition in a manner that minimizes the negative impact on its credit quality. However, should the companies become engaged in a bidding contest for Dollar Thrifty, there is a risk that the winner could be burdened with a level of debt and additional intermediate-term financial risk that outweighs the longer-term strategic benefits of the transaction. This would place pressure on the acquiring firm's rating. Moody's notes that Hertz's original proposal to acquire Dollar Thrifty for $1.3 billion did not result in any downward pressure on its rating or outlook; they were maintained at the B1/Negative level that had been in place prior to the offer.

While the acquisition of Dollar Thrifty by Hertz or Avis could remain positive for industry fundamentals, it could be an intermediate-term credit negative for the winning bidder if the price and level of additional indebtedness are too great.

The potential acquisition of Dollar Thrifty by either Hertz or Avis would be a credit positive for Dollar Thrifty. The key constraint on Dollar Thrifty's B3 CFR rating has been its small size relative to the three leading US rental companies (Enterprise, Hertz and Avis) and its concentration in the value-oriented segment of the leisure travel market. Dollar Thrifty's positive outlook reflects the fact that this risk factor would be considerably mitigated by a Hertz or Avis acquisition.

Hertz's B1 CFR and negative outlook primarily reflects credit metrics that are currently weak for the B1 rating level and the company's need to refinance $1.7 billion in international fleet financing. An additional concern is the company's ability to maintain adequate liquidity given the funding requirements that might arise from its original bid for Dollar Thrifty.

Avis' B2 CFR and positive outlook reflect credit metrics that are appropriate for the current rating level and that could improve during 2010 and 2011 as a result of strengthening industry fundamentals.

The last rating action on Avis was an upgrade of the company's secured credit facility to Ba2 on March 3, 2010.

The last rating action on Hertz was a downgrade of the company's CFR to B1 and change in its outlook to negative on July 14, 2009.

The last rating action on Dollar Thrifty was a change in the company's outlook to positive on April 28, 2010.

The principal methodology used in rating Avis, Hertz and Dollar Thrifty was Moody's Global Equipment and Automobile Rental, published in August 2007 and available on www.moodys.com in the Rating Methodologies sub-directory under the Research & Ratings tab. Other methodologies and factors that may have been considered in the process of rating this issuer can also be found in the Rating Methodologies sub-directory on Moody's website.

New York
Michael J. Mulvaney
Managing Director
Corporate Finance Group
Moody's Investors Service
JOURNALISTS: 212-553-0376
SUBSCRIBERS: 212-553-1653

New York
J. Bruce Clark
Senior Vice President
Corporate Finance Group
Moody's Investors Service
JOURNALISTS: 212-553-0376
SUBSCRIBERS: 212-553-1653

Moody's says a bidding war for Dollar-Thrifty could pose risks for the ultimate acquirer
No Related Data.
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