Up for bidding is the sale of Hertz Corporation, a wholly-owned subsidiary of The Ford Motor Company. The Carlyle Group and its partners are working on the terms of its bid proposal. This case study allows students to understand the associated IRR multiples utilizing the calculated EBITDA multiples provided for the different sectors of the Hertz business.
Susan Chaplinsky and Felicia C. Marston
Harvard Business Review (UV1056-PDF-ENG)
February 17, 2009
Case questions answered:
- Find the best IRR multiple for optimal bid acceptance probability.
- Model the valuation for Hertz.
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Case answers for Bidding for Hertz: Leveraged Buyout
This case solution includes an Excel file with calculations.
Introduction – Bidding for Hertz: Leveraged Buyout
In the summer of 2005, the Carlyle group became interested in the outright acquisition of Hertz. At the time, Hertz was a wholly-owned subsidiary of Ford Motor Company after former CEO and President Jacques Nasser began diversifying the business.
While the prospect of Ford initially acquiring Hertz sounded like a sound financial decision by the end of Nasser’s term, he had reduced the cash reserves of Ford Motor Company from $15 billion to $1 billion. This put the new CEO of Ford Motor Company in a position to sell this piece of the business in a strategic re-prioritization.
Ford then decided that if it were not able to capture enough value through an outright buyout opportunity, then it would need to explore the possibility of IPO for Hertz.
It is important to highlight that for the entire of Ford owning Hertz. Hertz was provided with complete autonomy with virtually no oversight by Ford Motor Company itself. This attribute alone made it an excellent candidate for an LBO.
Three crucial criteria would need to be met in order to provide an adequate bid for Hertz. The bid would have to best any competing bids, it would have to provide higher IRR than a traditional IPO, and it would need to satisfy the sponsor’s limited partners.
In order to achieve all of these criteria, Carlyle would need to provide a well-structured bid, but one that would still provide the group with adequate cash returns moving forward.
This would take the form of an LBO compared to an IPO analysis in a fashion that would still net the Carlyle group returns significant enough to warrant the acquisition while chiefly using mean, median, and combination multiples.
The main part of this analysis is finding and understanding the associated IRR multiples utilizing the calculated EBITDA multiples provided for the different sectors of the Hertz business.
The analysis began with four different analyses utilizing four different EBITDA multiples in order to calculate a total equity value. The four multiples were used for the distributions included calculated median multiples, mean multiples, DTF + URI multiples, and URI as a standalone multiple. The multiples analyzed (as EBITDA Car Rental Multiples) were 6.47, 7.04, 6.18, and 8.47, respectively.
Another important variable that we estimated through calculation was the overall estimated value of Hertz Rental Equipment. This was calculated by…