Avis Budget Group is seeking financing to back its bid for Dollar Thrifty, raising its secured debt from US$1.5 billion to US$2 billion. Hertz made an initial bid for the Dollar Thrifty group in April at US$41 a share although Avis has now made a substantially higher bid for the group.

The car rental industry has gone through tough times over recent years with higher oil prices, recession and a downturn in demand for used car sales; a key factor ensuring that car rental companies attain a high residual value for their car purchases and assets.

The Dollar Thrifty Group is predominantly focused in the downtown leisure sector, offering value rentals. These sectors are not a particular focus for Avis Budget Group with the group traditionally focused on the business and airport sectors. If successful, this purchase would expand the Avis Budget Group's service offering into new sectors and a stronger presence in the US.

Avis Budget generated over 81% of its revenue from airport locations. Its Avis and Budget brands combined have a significant market share in the airport car rental business when compared to competitors such as Hertz. However, privately-held Enterprise Rent-a-car is more than twice as large as runner-up Avis Budget by market share. This recent bid for Dollar Thrifty will enable Avis Budget to compete in the downtown leisure sector on similar terms as Enterprise which is predominantly focused in this specific sector of car rental in the US.

On the news of the recent bidding war, shares of Dollar Thrifty have risen 18 percent and now trade at around US$45.76.

The debt facility amendment for Avis Budget Group also proposes to enable Avis to issue second-lien high yield notes. The definition used in calculating the debt to EBITDA covenant is also proposed to be changed.

Consenting lenders will get a 12.5 basis points amendment fee upon closing of the amendment and another 12.5 basis points if the acquisition succeeds. In April 2010, Avis Budget Group gathered US$983 million of commitments on its extended revolving credit facility due April 2013. The remaining US$191 million of the revolver matures in April 2011. Avis Budget Group also extended US$350 million of its US$787 million TLB due April 2012 to April 2014. In return for the extension, lenders got a 100 basis points extension fee.

Financial covenants include a leverage ratio of 6.25 times until June, which will then be reduced through the deal period until it reaches 4.25 times in 2013. The interest coverage ratio is 1.3 times.

The rental industry has gone through a period where profit margins have been under pressure and the start of this bidding war for the purchase of Dollar Thrifty is a sign of further consolidation in the industry.

Author: Mike King, Analyst