Avis Acquires Zipcar

That was fast.

A week ago we were posting about the Big Three US auto companies trying to figure out the future in the face of declining drivers' registrations. So the very first deal of 2013 turns out to be Avis' acquisition of Zipcar.

What does this mean?

There has long been a complicated and not always advantageous relationship between the manufacturers and rental companies. In fact, some of the rental companies were owned by manufacturers at one time or another. The rental business was seen as a good way of managing inventory by manufacturers and those rental companies that were independent saw the relationship as a good way to source cars at a less expensive price.

The car sharing business is based on similar but significantly different assumption. Instead of focusing on business travelers and vacationing families, the sharing business concentrates in urban areas where large numbers of young people with limited resources may occasionally want a car for a couple of hours.

The business has been the stuff of legend because it is a feel-good business story about meeting a market need with a creative environmentally positive strategy. However, the stock price performance has been sluggish because the company was perceived to be insufficiently capitalized to realize the demands of the global opportunity, especially as there are other entrants in the market.

That is where Avis and its established and deep-pocketed corporate structure come in. Some will decry the corporatization of what was originally perceived to be a counter-cultural business enterprise. But the acquisition will give Zipcar the ability to make this model globally accessible, consistent both with its original vision - and the realities of contemporary economics. JL

Sagarika Jaisinghani and Tej Sapru report in Reuters:

Car rental company Avis Budget Group Inc will buy Zipcar Inc for about $500 million in cash to join larger rivals Hertz Global Holdings Inc and Enterprise Holdings Inc in the fast-growing U.S. car-sharing market. The offer of $12.25 per share represents a premium of 49 percent to Zipcar's Monday close. Zipcar's shares were up 48 percent at $12.16 before the bell on Wednesday.

"We see car sharing as highly complementary to traditional car rental, with rapid growth potential and representing a scalable opportunity for us as a combined company," Avis Chief Executive Ronald Nelson said in a statement.

Avis has been relegated to No.3 in the $22 billion U.S. car rental industry, after Hertz secured the No.2 spot with its acquisition of Dollar Thrifty Automotive Group in August.

Avis also bid for Dollar Thrifty in 2010, but later dropped out of the race.

Zipcar, founded more than 10 years ago, pioneered car-sharing services in the United States. Car sharing allows customers to rent cars at an hourly or daily rate and park in convenient reserved spots. Zipcar went public in April 2011 and raised about $174 million.

The company has struggled in recent times, however, as higher demand for car sharing in the face of rising gasoline prices has attracted traditional car rental companies such as Hertz and Enterprise.

Enterprise, the largest U.S. car rental company, expanded its short-term car sharing business after it bought Mint Cars On-Demand and PhillyCarShare in 2012.

The deal, expected to close in the spring of 2013, will add to Avis' earnings, excluding items, from the second year and is expected to generate between $50 million and $70 million in annual synergies.

Avis said it expects to fund the transaction primarily with available cash and additional debt. The company had cash and marketable securities of about $554 million as of September 30.