Avis Budget LBO interest is heating up, bankers say28 May 2007

Avis Budget Group is being presented to private equity shops by one investment bank as a potential buyout candidate, according to an investment banking source claiming knowledge of the situation. Avis, the New Jersey-based car rental company, is a spin-off of Cendant Corp.
A second banker claiming knowledge of the situation said bankers are working on a complex asset-securitization operation to facilitate a potential leverage buyout of Avis on behalf of a large PE client. This source hinted that because of the complexity of this transaction there is no guarantee that bankers will pull it off.
The same source said a number of private equity shops had looked at Avis several months ago, and two of them, Texas Pacific Group and Bain Capital, had sought financing for an Avis buyout at that time. However, the same source also added that there were other PE firms reaching out to lenders at that time.
The first investment banking source said that a senior executive at an investment bank has been contacting private equity firms about Avis, but would not disclose which bank was working on it.
Work on a potential Avis LBO started to heat up in the last few days, according to the second source, who declined to elaborate further.
An Avis investor relations official said the company does not comment on market speculation or rumor. Ronald Nelson, chairman and CEO of Avis, and two other spokespersons for Avis did not return repeated calls for comment on the matter. A spokesperson for Bain had no comment, and a TPG spokesperson had no immediate comment and did not call back.
A third banking source working in the space and an industry investor both expressed surprise to hear private equity firms were choosing to go after Avis when targets like DollarThrifty and United Rentals are still on the market. While United Rentals is currently in the process of considering offers, Dollar could consider a sale after completing the current refinancing strategy, said the banking source and industry investor, with the latter adding Dollar’s refinancing package was not particularly significant to discount a deal as the company has a hefty amount of debt associated with its fleet anyhow.
The third banker said that after talking to Avis management, he had the impression the company would sell for a significant premium. Despite Avis’s consistent stock appreciation post-IPO, the industry investor questioned whether it would be an appropriate time to take Avis private as Vanguard and Enterprise are set to combine into a much stronger competitor.
Avis has been performing well, with revenues increasing 2% in the first quarter of 2007, a separate banker familiar with the space noted. Avis reported that it has been able to increase pricing on its car rentals by 3% in the first quarter.
Previous analyst reports said Dollar could expect 10x EBITDA in a sale scenario. Pricing expectations for a potential Avis LBO could be similar, if not slightly better than that of Dollar, said the industry investor. While the companies are similar, the dual brands of AvisBudget mitigate risks associated with budget vacation travellers (high gas prices and low consumer confidence) with a professional renter aspect. “If I were advising Avis, the fact that these two brands actually have different client bases is really advantageous,” said the industry investor.
Currently, Avis trades at an EV/TTM EBITDA basis of 9.98x and is levered 3.46x net debt/EBITDA excluding any debt under its vehicle programs.
According to the company's latest 10-Q, Avis’ vehicle programs are generally funded through the issuance of debt that is collateralized by its fleet. The income generated by these assets is used, in part, to repay the principal and interest associated with the debt.
A potential LBO deal will have to address over USD 5.5bn worth of asset-backed debt attached to the company's car rental fleet. Bankers will need to find the collateral to support the additional layers of debt needed to take the company private.
by Yana Morris and Soma Biswas

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