Avis Buys Zipcar As Competition Heats Up In The U.S. Car Rental Market

Continuing on the trend of acquisitions in the car rental business, Avis has decided to acquire Zipcar (NYSE:ZIP) for $491 million or $12.25 per share, a 49% premium to Zipcar’s prior closing price. Although that may sound like a huge premium, the price is still almost 32% below Zipcar’s $18 IPO price back in April 2011. But given the potential synergies that could be generated by the acquisition, Avis seems to have negotiated a good deal.

Avis Budget Group, Inc is the parent company of Avis Rent a Car System, Budget Rent a Car and Budget Truck Rental and is present across 10,000 rental locations in 175 countries. ^[1] Recently, Hertz Holding also completed the acquisition of Dollar Thrifty Automotive Group Inc in November 2012 to consolidate its position as the second largest car rental company in the U.S. Avis Budget Group is the third largest currently while Enterprise Holdings Inc. is the largest.

See our full analysis for Zipcar

Potential Synergies

One area where this deal could benefit Avis is a reduction in the hefty sums required for acquiring new vehicles. Since the two companies by and large have a different business model and a distinctly different clientele, Avis’s fleet and Zipcar’s fleet can complement each other. Avis generally rents out cars in multiples of days and most of its customers are business class or working professionals who need vehicles on weekdays. On the other hand, Zipcar gives customers the options of renting out cars for a few hours. Its customers are generally the people who find the concept of owning a car too much of a hassle or students who are not able to afford a car for themselves.

The demand for its vehicles soars during the weekend. Often, there is a shortage of Zipcars during the weekend and in such a scenario, Avis can complement its own idle fleet with Zipcar’s fleet so as to ensure a more efficient usage of vehicles. Conversely, Zipcar can complement Avis’s fleet during its busier weekdays. Thus if management works out things smartly, the deal could ensure that the company is able to cater to more customers with the same number of vehicles.

This will result in significant savings from needing to invest in a larger fleet of cars. The car rental business requires a significant amount of investment by companies since buying new vehicles requires payment up front. Companies eventually cover off the costs through rent payments and annual charges. They also sell used rental cars later to dealers and through other channels.

Furthermore, operational efficiencies could be enhanced by widening services such as one-way rentals (currently offered by Hertz) which might not have been possible before since, as already pointed out, Avis rented out vehicles at least for the whole day and not for a few hours. Overall, Avis estimates the synergies associated with the acquisition could very well be in the range of $50 million to $70 million annually.

Apart from the synergies, Zipcar itself had been quite busy expanding beyond its traditional car rental business in North America. Early in the third quarter of 2012, it acquired leading Austrian company Carsharing.at, a leading car sharing service with over 10,000 members and a fleet of 200 vehicles. It also launched Zipvan, an innovative cargo van sharing service back in 2011.

Following the acquisition of Zipcar, we will be launching the coverage of Avis Budget soon.

Understand How a Company’s Products Impact its Stock Price at Trefis

1. Hertz Dollar Thrifty Purchase Cleared by U.S. Regulator, January 3, 2012, bloomberg.com [↩]