Hertz Buyout Is Largest since RJR

Buyouts announced this year have already reached a record level in excess of $200 billion.
Stephen TaubSeptember 13, 2005

In a long-anticipated deal, Ford Motor Co. announced that it has agreed to sell rental-car company Hertz Corp. to Clayton, Dubilier & Rice Inc., The Carlyle Group, and Merrill Lynch Global Private Equity for $15 billion, including the assumption of nearly $10 billion in debt.

“This transaction reinforces our commitment to strengthening our balance sheet and investing in our core automotive business,” said the automaker’s chief financial officer, Don Leclair, in a statement.

“We have been looking at Hertz for more than three years and believe it fits squarely within our investment strategy — a complex corporate divestiture of a market leading business with a powerful franchise and opportunities for profitable growth,” said David H. Wasserman, the partner who led the transaction negotiations for Clayton, in a statement.

This would be the second-largest private equity deal ever, after Kohlberg Kravis Roberts’ celebrated $31.4 billion purchase of RJR Nabisco in 1989. The Hertz deal is expected to close by the end of the year.

Buyouts announced this year have already reached a record level in excess of $200 billion, according to Bloomberg. Buyout firms make their deals using a combination of cash and debt, and even though short-term rates have surged in the past 15 months, longer-term rates have remained pretty steady and are much lower than a few years ago, so firms are enjoying relatively low-cost capital.

In 2004, buyout funds racked up returns that averaged 16.4 percent, compared with a 9 percent increase in the S&P 500 Index, according to Bloomberg, citing Thomson Venture Economics and the National Venture Capital Association.

Don’t be surprised to see more-sizable buyouts in the future. Buyout funds have raised $98 billion this year alone — nearly 50 percent more than in all of 2004, reported the wire service, citing London-based Private Equity Intelligence Ltd. Carlyle created the largest U.S. buyout fund when it raised $7.85 billion in March, and Blackstone Group LP has received commitments of $12.5 billion for a global fund, according to Bloomberg. The wire service also noted that London-based CVC Capital Partners Ltd. raised $7.37 billion in July, creating Europe’s biggest buyout fund.

“Anywhere between $250 billion and $300 billion is there to do deals,” Francis Aquila, a senior mergers partner at Sullivan & Cromwell LLP, told Bloomberg. “We are in a very strong seller’s market,” added Frederick Joseph, who was chief executive of Drexel Burnham Lambert Inc. when it helped finance the RJR Nabisco deal, the wire service also reported.