13.12.

2007
Case Study:
The Hertz Corporation
Presentation: Mariano Mateos, Ricardo Velilla, Elias Vlker
Casestudy: The Hertz Corporation 13.12.2007 2
The Bid for Hertz
Casestudy: The Hertz Corporation 13.12.2007 3
Agenda
Deal Structure
How to create value
Hertz Company Overview
Financial Engineering
Conclusion
Casestudy: The Hertz Corporation 13.12.2007 4
Intro
Ford Motor
Company
CD&R
Other PE
firms
Hertz
Corporation
Casestudy: The Hertz Corporation 13.12.2007 5
Hertz business areas
Hertz
RAC
HERC
USA Europe
Region
Off/On-airports
1,77 million cars
$17 bln market
revenues
180 largest
airports
Off/On-airports
12% share of the
market
$10 bln market
revenues

The third largest
company
$1,2 bln revenue
The fourth
largest company
$152 mln
revenue
Casestudy: The Hertz Corporation 13.12.2007 6
Agenda
Deal Structure
How to create value
Hertz Company Overview
Financial Engineering
Conclusion
Casestudy: The Hertz Corporation 13.12.2007 7
Clayton, Dubilier & Rice Inc.
Private equity investment firm
founded in 1978
Investments in 39 US and
European businesses
Specialized in acquiring
under-managed divisions
Has obtained a higher and
steady return on investment
The case of Hertz
Casestudy: The Hertz Corporation 13.12.2007 8
First Stage: Uninteresting Bid
YEAR 2002
CD&R began studying the
rental car business (RAC).
Early in its investigation, CD&R
studied Budget and Alamo.
Hertz Much more attractive.
Ford dismissed the proposal as
uninteresting and unfeasible.
CD&R financing challenge
Securitizing Hertzs rental fleet
in cooperation with Lehman
Brothers and Deutsche Bank
New proposals.
YEAR 2003
CD&R convinced that Hertzs
capital structure was inefficient.
New visit to Ford The deal
could be indeed financed.
Hertz was non-strategic to Ford.
Ford executives remained
unconvinced as well as Hertzs
CEO.

Casestudy: The Hertz Corporation 13.12.2007 9
Second Stage: Ford sells
YEAR 2005
Early 2005 Ford core US auto business was in trouble.
Monetizing Hertz One step to improve Ford balance sheet.
Ford advisors recommended two tracks:
IPO Filed in June
Sale of the business Proposal and preliminary bids by
July
Ford made confidential financing and operating information.
Hertz executives Informational meetings with potential buyers.
After a month of due diligence, CD&R identified several specific
opportunities for improving operations.
Casestudy: The Hertz Corporation 13.12.2007 10
Improving Hertz Operations
HERTZ
US RAC On-airport
Operating Expenses
US RAC Off-airport
strategy
European OpEx &
SG&A
US RAC Fleet Costs
US RAC Non-Fleet
CapEx
HERC ROIC
Casestudy: The Hertz Corporation 13.12.2007 11
Agenda
Deal Structure
How to create value
Hertz Company Overview
Financial Engineering
Conclusion
Casestudy: The Hertz Corporation 13.12.2007 12
Key Questions of Deal Structure
1. Can fleet be used as a source of
debt capacity?
2. Can ABS financing be used for
a levered buy out?
3. How can lenders be serviced
and protected?
Casestudy: The Hertz Corporation 13.12.2007 13
Proposed Corporate Structure
The Hertz
Corporation
Domestic
Subsidiaries
HERC
Hertz Vehicle
Financing
Hertz
International
OpCo

OpCo owns rest of Hertzs assets
Conducts all rental transactions with
customers
Leases fleet from FleetCo and
provides equity for FleetCo
FleetCo

Bankruptcy remote special purpose
entities provide optimized
securitization for asset backed debt
financing
Leasing rates from OpCo cover
debt payments
Casestudy: The Hertz Corporation 13.12.2007 14
Agenda
Deal Structure
How to create value
Hertz Company Overview
Financial Engineering
Conclusion
Casestudy: The Hertz Corporation 13.12.2007 15
Goals of new capital structure
Hertz should be able to survive a severe business
downturn without need to restructure or default
Stability
Hertz should be able to exploit future growth
opportunities without having to refinance
Liquidity
Capital structure should enable Hertz to make large
car purchases and manage fluctuations in the rental
activity
Flexibility
Funds should be obtained at significantly lower cost
than current capital
Lower
Costs
1
4
3
2
Casestudy: The Hertz Corporation 13.12.2007 16
The Layer Cake
FleetCo (in m$)
Cash 526, 4
US Fleet ABS
Internat. Fleet ABS
5.256,7
1.972,4
Total FleetCo Debt 7.229,1
Fleet Enhancement Cars
Fleet Enhancement LC
Fleet Enhancement Cash
200
115,1
1.346,9
Total FleetCo Equity 1662,0
OpCo (in m$)
Sponsor Equity 2295,0
Total OpCo Equity 2295,0
ABL Facility 396
Term Loan B
Senior Unsecured Notes
1.850
2.250
Total OpCo Debt 5.296,0
Senior Sub Notes
Existing Debt
800
0
Total Capitalization: 16,482,1 m$
Casestudy: The Hertz Corporation 13.12.2007 17
Advantages
New capital structure highly leverages Hertz

Long term debt agreements ensure stability

Not all debt was drawn immediately, so
liquidity and flexibility was ensured

Capital Cost are lowered through extensive
use of asset backed facilities
Casestudy: The Hertz Corporation 13.12.2007 18
Calculation of Capital Cost
1. FleetCo
Amount Interest in %
Debt
US Fleet ABS 5256,7 L+60 4,94%
International Fleet ABS 1972,4 L+100 5,34%
Equity
Total Equity 1662 15,83%
WACC (FleetCo) 6,24%
2. OpCo
Amount Interest in %
Debt
ABL Facility 396 L+250 6,84%
Term Loan B 1850 L+300 7,34%
Senior Unsecured Loan 2250 9,50%
Senior Sub Notes 800 10,75%
Equity
Sponsor's Equity 2295 15,83%
WACC (OpCo) 9,66%
3. Hertz Total
Amount Interest in %
Debt
Total Debt 12525,1
Equity
Total Equity 3957
WACC (Hertz) 0,07817571 7,82%
4. Assumptions
Beta 1,5
Risk Free Rate 4,34%
Market Return 12%
Tax Rate 20%
Casestudy: The Hertz Corporation 13.12.2007 19
Agenda
Deal Structure
How to create value
Hertz Company Overview
Financial Engineering
Conclusion
Casestudy: The Hertz Corporation 13.12.2007 20
The Question

Both PE-groups bid around $5,4 bln for Hertz

Ford asks for a revised bid

CD&R are considering whether $5,6 bln are
still a fair price...
Casestudy: The Hertz Corporation 13.12.2007 21
Original Valuation
This is what their valuation might have looked
like...
Free Cash Flow & NPV Calculation based on CD&R Information
2005 2006 2007 2008 2009 2010
Corporate EBITDA 1.019,0 1.254,8 1.323,7 1.396,1 1.472,3 1.552,6
Net Non-Fleet CapEx 0,0 50,7 14,6 15,2 15,9 16,6
Delta NWC 14,8 59,0 17,2 18,1 19,1 20,1
Delta Others 2,0 7,1 2,1 2,2 2,3 2,4
FCFF 1.006,3 1.152,2 1.293,9 1.364,9 1.439,7 1.518,3
Cost of Equity 7,82% 7,82% 7,82% 7,82% 7,82% 7,82%
Discount factor 100% 92,7% 86,0% 79,8% 74,0% 68,6%
Discounted FCFF 0 1068,7 1113,1 1089,0 1065,4 1042,1
NPV 5.378
Casestudy: The Hertz Corporation 13.12.2007 22
What are the value drivers?
CD&R already pushed capital structure and leverage
to the limit
Significantly lower WACC is very unrealistic
Lower
WACC
CD&R included conservative cost cutting projections
Still quite some leeway for further improvements
Most realistic value driver
Less
Costs
Projections already include revenue growth forecast
No rational reason for Hertz to outperform the market
Revenue growth above market highly speculative
More
Revenues
RAC and equipment rental are businesses with short
cash cycles
Thus timing of cash flows is no lever for value
Timing of
Cash
Flows
Casestudy: The Hertz Corporation 13.12.2007 23
Improving Hertz Operations
HERTZ
US RAC On-airport
Operating Expenses
US RAC Off-airport
strategy
European OpEx &
SG&A
US RAC Fleet Costs
US RAC Non-Fleet
CapEx
HERC ROIC
Casestudy: The Hertz Corporation 13.12.2007 24
Further savings potential
1. Further Savings Potential
2006 2007 2008 2009 2010
Priced in 243,0 243,0 243,0 243,0 243,0
On-Airport OpEx 75,0 75,0 75,0 75,0 75,0
Off-Airport 58,0 58,0 58,0 58,0 58,0
Europe 33,0 33,0 33,0 33,0 33,0
Non-Fleet CapEx 57,0 57,0 57,0 57,0 57,0
HERC 20,0 20,0 20,0 20,0 20,0
Projected 411,5 411,5 411,5 411,5 411,5
On-Airport OpEx 89,7 89,7 89,7 89,7 89,7
Off-Airport 100,0 100,0 100,0 100,0 100,0
Europe 100,0 100,0 100,0 100,0 100,0
Non-Fleet CapEx 90,0 90,0 90,0 90,0 90,0
HERC 31,8 31,8 31,8 31,8 31,8
Mean 327,2 327,2 327,2 327,2 327,2
(Projected-Priced) 168,5 168,5 168,5 168,5 168,5
(Projected-Mean) 84,2 84,2 84,2 84,2 84,2
Casestudy: The Hertz Corporation 13.12.2007 25
Modified valuation
By including higher cost savings into the
projections, we arrive at a valuation that is
$278 mln higher...
Free Cash Flow & NPV Calculation with higher projected savings
2005 2006 2007 2008 2009 2010
Corporate EBITDA 1.019,0 1.322,6 1.395,7 1.472,8 1.553,9 1.639,5
Net Non-Fleet CapEx 0,0 61,9 14,8 15,4 16,0 16,7
Delta NWC 14,8 75,9 18,3 19,3 20,3 21,4
Delta Others 2,0 9,1 2,2 2,3 2,4 2,6
FCFF 1.006,3 1.193,8 1.364,9 1.440,4 1.520,0 1.604,0
Cost of Equity 7,82% 7,82% 7,82% 7,82% 7,82% 7,82%
Discount factor 100% 92,7% 86,0% 79,8% 74,0% 68,6%
Discounted FCFF 0 1107,3 1174,1 1149,3 1124,9 1100,9
NPV 5.656
Casestudy: The Hertz Corporation 13.12.2007 26
Conclusion

We think...

...that a valuation of $5,6 bln can be justified

...CD&R should go ahead with the deal

History proves us right...
Casestudy: The Hertz Corporation 13.12.2007 27
Thank you for your
attention!

Any questions?