“The rental car market is on fire and companies have found pricing discipline,” said Hamzah Mazari, analyst at Jefferies. “What was once a dysfunctional oligopoly is now functional.” Hertz (symbol: HTZGQ),

Budget Opinion Group

(CAR) and private companies control around 95% of the domestic market.

The way to play Hertz is through its current stock, which has nearly doubled, to $ 7.15, since mid-May. It was then that a group led by Knighthead Capital Management, Certares Management and

Global management of Apollo

(APO) won a bidding competition in bankruptcy court for the company. More upside is likely after Hertz exits bankruptcy, scheduled for June 30, with the new stock trading the next day. Hertz will come out with little to no corporate net debt, while Avis has about $ 3.5 billion.

“Our plan for Hertz is to invest heavily in modernizing the technology of the business and improving the customer experience,” said Greg O’Hara, senior managing director and founder of Certares. Barron. “With the right size capital structure and favorable economic winds, we can also transform Hertz – which has always had a strong brand – into a stronger company. “

Andy Taylor, Managing Director of Carronade Capital Management, another company involved in the restructuring, said: “It is hard to overstate how well Hertz is positioned following this restructuring. Hertz will emerge with the healthiest balance sheet in the rental car industry in an unprecedented demand and price environment, which is expected to persist until the second half of 2022, as the industry cannot increase supply due to from a 50-year low in the automotive industry. inventory.”

The current Hertz shares are to be exchanged for a package consisting of $ 1.53 per share in cash, 3% of the shares of the reorganized company and warrants – a long-term call option – for 18% of the share. new post-bankruptcy company. Holders of current Hertz shares could make $ 10 to $ 12 per share, Taylor says.

Initial trading of new Hertz shares could start at $ 13.80, valued at $ 6.5 billion based on approximately 472 million shares outstanding. There is also $ 1.5 billion in preferred shares held by Apollo.

Suppose there is no net debt and Hertz is valued at roughly nine times the expected 2023 earnings before interest, taxes, depreciation, and amortization, or Ebitda, of $ 859 million. This projection was made by the management of Hertz in April and could prove to be prudent given the strong trends in the sector.

Many investors are bewildered by the set of securities Hertz holders will get. As stated, holders will receive $ 1.53 per share in cash, new shares and warrants for each current Hertz share. The equity portion could be worth around $ 1.25 for a current Hertz share, based on the estimated issuance to Hertz holders of 14 million new shares, or nearly a tenth of a new share for each Hertz share. current.

Current Hertz holders are expected to get nearly two-thirds of a warrant for each share with an exercise price of $ 6.5 billion in new share value, or $ 13.80 per share based on the new stock. The money order should represent the bulk of the value of the package.

Warrants are difficult to value. Their 30-year maturity – most warrants expire in less than 10 years – makes them valuable. Based on the option pricing models, each could trade around $ 8, assuming a share price of $ 14, meaning that holders would get around $ 5 in warrant value.

Using these assumptions, the set of cash, stocks, and warrants could be worth about $ 8 per current Hertz share: $ 1.53 per share in cash, $ 1.25 in shares, and $ 5 in warrants. subscription, a premium over the current share price. If new Hertz win, there would be a further hike. The risk is a fall in the price of new shares and warrants.

The biggest risk investors face is that industry discipline crumbles when the car shortage eases. Still, Hertz and Avis have reduced their fleets during the pandemic and have been slow to rebuild them as automakers prioritize vehicle sales to dealerships. Hertz’s US fleet stood at 292,000 on March 31, down from 519,000 a year earlier.

One potential spark for Hertz would be a deal to sell cars to a large used car retailer. There was talk of a possible agreement between Hertz and

Carvana

(CVNA), which would help Hertz with used car sales and give Carvana a steady supply of vehicles. Carvana and Hertz did not respond to requests for comment.

Like its old advertising slogan, Hertz puts investors “in the driver’s seat” in a rapidly improving industry.

Write to Andrew Bary at [email protected]