Building on its acquisition of Zipcar earlier this year, Avis Budget Group Inc. (NASDAQ:CAR) just announced it is buying deep-value rival Payless Car Rental, the sixth-largest car rental company in North America, in a $50 million deal. The deal marks the continued consolidation of the car rental industry, one that is already heavily rolled up into just a few hands.
Following Hertz Global Holdings, Inc. (NYSE:HTZ)‘s acquisition of Dollar Thrifty this year, there are just three car rental companies controlling 95% of the market. While airport car rentals are the biggest drivers for the industry, accounting for 70% of revenues for both Avis Budget Group Inc. (NASDAQ:CAR) and Hertz Global Holdings, Inc. (NYSE:HTZ), the overall industry leader is privately held Enterprise Rent-A-Car, which has a decidedly more neighborhood-oriented approach and owns 70% of that market.
The off-airport market is an $11 billion industry, but it’s dominated by the premium and mid-tier value propositions. Avis Budget Group Inc. (NASDAQ:CAR) is following Hertz Global Holdings, Inc. (NYSE:HTZ)’s lead by going after the deep-value market, which is represented by brands like Payless, Sixt (a Hertz company), and Advantage (which Hertz sold to get the Dollar Thrifty acquisition past regulators).
With its $80 million in annual revenues, Avis Budget Group Inc. (NASDAQ:CAR) is looking for Payless to help cut into Enterprise’s neighborhood reign. It won’t be easy, since the industry giant has more than 5,500 locations across the country, but analysts anticipate that with a stronger economy, the North American car rental market will grow at a compounded annual rate of 5.5% between 2013 and 2017 as Americans take more leisure-related trips.
That’s borne out by the results achieved by online travel agent Priceline.com Inc (NASDAQ:PCLN) , which purchased a car rental business a few years ago and has seen it become a strong part of its online booking business. Last quarter the OTA saw domestic gross bookings grow 9% primarily because of growth in its domestic rental car reservations as rental car days increased sequentially from 37% to 43%.
The Payless deal isn’t a game changer for Avis Budget Group Inc. (NASDAQ:CAR), but does represent management’s holistic view to driving its business. Having acquired the leading name in car-sharing services, it now adds a top player in the underutilized deep-value market that ought to chip away at Enterprise’s dominance, even if it means consolidating the industry further.
The article Car Rental Companies Driven to Consolidate originally appeared on Fool.com.
Fool contributor Rich Duprey has no position in any stocks mentioned. The Motley Fool recommends Priceline.com Inc (NASDAQ:PCLN). The Motley Fool owns shares of Hertz Global Holdings, Inc. (NYSE:HTZ) and Priceline.com Inc (NASDAQ:PCLN).
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