Why is This Hedge Fund Bearish on a Hertz-Dollar Thrifty Merger?

YORK CAPITAL MANAGEMENTIn a recent 13G filing, James Dinan and York Capital Management decreased their ownership in Dollar Thrifty Automotive Group, Inc. (NYSE:DTG) from 11.3% down to 7.9%. James Dinan, strapped with an MBA from Harvard and experience at DLJ and Kellner DiLeo & Co., started York Capital in 1991.

James Dinan first bought Dollar Thrifty in the first quarter of 2011, when the company was trading around half of where it trades now. Dollar Thrifty moved into the top spot as York’s largest 13F holding in 4Q 2011, and as of the second quarter 2012 Dollar Thrifty represented 10.8% of York’s 13F portfolio.

Dollar Thrifty is engaged in the business of the daily rental of vehicles to business and leisure customers through company-owned stores. In late August, Hertz Global Holdings, Inc. (NSYE:HTZ), a company engaged in vehicle and equipment rental operations, announced a definitive merger agreement to purchase Dollar Thrifty for $87.50 per share in an all-cash that values the company around $2.3 billion.

We believe the reason for York’s selloff is that the firm is likely not interested in a repeat of 2011, when Hertz withdrew its takeover bid for Dollar Thrifty after a long back and forth saga. The upside for York at this stage is only around $0.50, with the stock trading around $8 and the acquisition price at $8.50. York also owns shares of Hertz, representing 4% of York’s 13F portfolio.

It appears that hedge funds are still betting on a Hertz-Dollar Thrifty beast. There are eight hedge funds we track that have over 4% of their 2Q 13F portfolios invested in Dollar Thrifty, see all hedge funds owing Dollar Thrifty.

The deal is expected to not only grow Hertz’s top line, which is estimated to grow from 8.9 billion in 2012 to 9.5 billion in 2013, but also afford the company various cost saving synergies. Hertz’s expects cost savings with the Dollar Thrifty acquisition of around $160 million per annum. The EPS estimates forecast a 17% increase in EPS from 2012 to 2013. The trailing P/E for the company is 23 and its forward P/E comes in at 9.

This deal will give Hertz a multi-brand offering that should prove to give it a competitive advantage over its rival Avis Budget Group Inc. (NASDAQ:CAR). With negative recent earnings, Avis does not have a recordable P/E but trades at a forward P/E of 6. Avis is about one third the size of Hertz according to market cap, with Dollar Thrifty coming in with a market cap about 25% greater than Avis.

The three of these companies, Dollar Thrifty, Hertz and Avis have had an interesting past. Hertz made its first bid for Dollar Thrifty in April 2010 for about $41 per share, a 19% premium to Dollar Thrifty’s stock price at the time. Less than a month later, Avis threw its hat in the ring, offering $46.50 a share for Dollar Thrifty. In September 2010, Avis bumped its bid to $47.13, but was struggling with possible regulatory issues of the merger. Shortly after, Hertz offered $50 a share. Later in September 2010 Avis bumped its offer to $53 per share. After several months, Hertz came back to the table and offered $72 a share. Avis has struggled for the last nine months trying to gain government and antitrust approval. Then in October 2011, Hertz officially dropped its bid for Dollar Thrifty citing market conditions. Then, of course, the company recently came back with its $87.50 offer.

James Dinan also owns United Rentals, Inc. (NYSE:URI), another rental company. United Rentals specializes in equipment and competes with the likes of H&E Equipment Services, Inc. (NASDAQ:HEES). These companies, albeit imperfect competitors, trade at much higher multiples compared to Hertz. United Rentals trades at a P/E of 40, P/S of 1.1 and a P/B of 2.3 and H&E trades at a P/E of 25, P/S 0.9 and a P/B of 2.4, while Hertz trades at a P/E of 23, P/S of 0.7 and a P/B of 1.6.

James Dinan has been a long time holder of Hertz and owns 12.6 million shares, which is about 3% of the company’s outstanding shares. We believe that Dinan will continue to hold Hertz even after the merger to capitalize on the vast synergetic benefits to come. For a complete look at Dinan’s holdings, continue reading here.

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