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Hertz IPO flop illustrates wariness to buyback deals

By Associated press
Published November 23, 2006


The market wasn't fooled by the Hertz IPO last week. Even though the rental car company is a household name, investors demanded a big discount before they would buy any of its newly offered shares.

The reason is simple: Hertz Global Holding Inc.'s private-equity owners bought the chain just more than a year ago and piled huge debt on to the company's books. They used the debt to lavish themselves with special payouts of about $1.4-billion as they flipped a hardly new-and-improved company back to the public market.

No wonder this IPO hit Wall Street with a loud thud. Investors, at least this time, refused to be sold a bill of goods.

Hertz debuted on the New York Stock Exchange and barely rose above its initial $15-a-share price.

Private-equity takeovers like Hertz's shield companies from shareholder and regulatory scrutiny, but more important for buyout firms with billion-dollar war chests, they have proved to be a financial bonanza.

That's because they often put themselves first by ensuring they will get paid handsomely even if the financial health of companies they acquire does not improve.

Hertz became somewhat of a poster child of such troublesome tactics since it was sold by Ford Motor Co. a year ago to Clayton, Dubilier & Rice Inc., the Carlyle Group and Merrill Lynch. They paid $2.3-billion in cash, borrowed more than $3-billion and assumed $10-billion in debt to acquire Hertz.

"Hertz became the IPO that everyone loved to hate because it was really only good to the venture capitalists," said John Fitzgibbon, who runs the Jersey City, N.J., research firm

Most of the proceeds of the IPO are going to pay off a $1-billion loan the private-equity owners took out to issue themselves a special dividend of $999.2-million in late June.

And whatever is left from the $1.3-billion IPO will help pay for another special dividend to the buyout firms of about $400-million, according to securities filings.

The dividends let the buyout firms recoup about 60 percent of their initial cash investment. Plus, the buyout firms own about 232-million shares, which at $15 each, is worth about $3.5-billion.

And they have been getting huge fees. Among those given were payments of $25-million that each of the three "sponsors" received when they bought Hertz from Ford.

They each got $1-million in consulting fees. Upon completion of the IPO, that arrangement will be terminated for a fee of $5-million each.

According to Hertz's most recent financial statements, its earnings totaled $76.1-million for the first nine months of this year - down from $325.3-million a year ago. At the same time, its interest expense jumped 90 percent to $672-million.

It's too soon to tell if the tepid response to Hertz and other buyout-backed IPOs reflects a shift in market thinking about the value of such deals. But investors are letting it be known they aren't happy with what they've seen.

[Last modified November 22, 2006, 21:23:06]

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