Avis to purchase Zipcar for $500m

February 2013 | DEALFRONT | MERGERS & ACQUISITIONS

Financier Worldwide Magazine

The highly consolidated car-sharing industry saw another high profile acquisition in early January with Avis Budget Group Inc announcing it will buy Zipcar Inc for around $500m.

Avis’ cash offer of $12.25 per share represented a premium of 49 percent over Zipcar’s closing price on the last day of trading in 2012. The deal is expected to be completed in spring 2013 and will see Zipcar operate as a subsidiary of Avis. Scott Griffiths will continue as Zipcar’s chairman and chief executive, and the company will continue with its planned move to new headquarters in Boston, Massachusetts.

Zipcar currently services around 767,000 members with operations in 20 cities across North America and Europe. In order to facilitate growth going forward, Avis intends to increase the number of markets in which Zipcar’s vehicles are located. Recent results announced by Zipcar showed that its membership increased by 18 percent in Q3 and had risen by almost a fifth by the end of 2012.

A number of recent acquisitions in the US and Europe has seen Zipcar become the world’s market leader in the car-sharing industry, controlling three-quarters of the US sector alone. Avis chairman and chief executive Ronald Nelson stated that the acquisition of the company will “significantly increase our growth potential, both in the United States and internationally.”

Ever increasing fuel prices and a greater demand for ‘greener’ transport schemes has led analysts to believe that the market, which is currently worth $400m a year, will be worth $10bn in the next few years. As city dwellers and students look to move away from expensive, traditional motor vehicle ownership, the daily or hourly rental schemes offered by car-sharing companies are becoming progressively more attractive.

During a conference call to analysts, Mr Nelson stated that with the integration of Zipcar’s technology into their existing fleet of vehicles Avis can supplement the smaller Zipcar fleet in order to meet the high weekend demand of members. More traditional car rental schemes see a spike in utilisation during the working week which ordinarily tails off at the weekends. In the case of new car-sharing schemes, the reverse is true. Accordingly, the two fleets of vehicles will complement one another during their respective peak times. When discussing the symbiotic nature of the new enterprise Mr Nelson said “I’ve been somewhat dismissive of car-sharing in the past, but what I’ve come to realise is that car-sharing...is complementary to our traditional car rental model.”

Avis’ traditional rivals Hertz and Enterprise have also been attracted to the increasingly popular car-sharing market in recent years. The $2.3bn acquisition of rival car-sharing firm Dollar Thrifty Automotive Group by Hertz, completed in November 2012, relegated Avis to third place in the highly competitive $22bn a year car rental industry. Avis itself had previously attempted to acquire Dollar Thrifty in 2010.

Zipcar went public in April 2011 with a banner IPO which earned the company a market valuation of $1bn. However, despite the company’s strong opening, Zipcar has subsequently seen 72 percent wiped off its value. While the company’s shares at one point had been valued at $28, they closed 2012 valued at just over $8 per share. Avis’ cash offer is a 32 percent discount on the company’s $18 IPO share price.

Although Zipcar has posted losses every year since it was founded, the company’s sales have recorded double digit percentage gains in each quarter since it went public in 2011. These gains have been a result of steady membership increases and entering into new markets. During the conference call Mr Griffith noted 2012 would be Zipcar’s “first full year of profitability”. Indeed, during the company’s most recent quarter net income reached $4.3m while revenues were up to $78m. Mr Griffin said “We believe (the sale to Avis) is a major step forward to reaching our goal of fundamentally revolutionising personal mobility.”

Avis anticipates that it will make between $50m and $70m in annual synergies from the deal. The company believes that will increase its adjusted earnings in the second year after the deal closes.

Following the announcement Avis’s shares rose 4.4 percent to $20.69 on the NASDAQ.

Richard Summerfield