Until recently, the car rental industry experienced little change. As U.S. car rental companies benefit from the resurgence in travel spending by both domestic and foreign consumers, companies are equipped with more cash on their balance sheets to grow via mergers and acquisitions. A case in point, Parsippany, N.J.-based Avis Budget Group Inc. (Nasdaq: CAR) began pushing its traditional rental boundaries at the start of 2013.
Avis' M&A strategy-the purchases of Zipcar Inc. and Payless Car Rental System Inc.-reflected an increased exposure to the rapidly growing practice of car sharing and the move away from traditional rental-desk transactions.
In January, Avis purchased Cambridge, Mass.-based Zipcar for $12.25 a share-a premium of 49 percent over the target's closing stock price of $8.24 at the end of 2012. Zipcar rents out vehicles by the hour or the day.
Zipcar, founded in 2000, has more than 760,000 members and operates in about 20 metropolitan areas in the U.S., Canada and Europe. Prior to the Avis deal, the company had done a fair share of dealmaking in its own right. In 2007 it merged with a car-sharing rival, Flexcar, and went public in April 2011 at $18 per share. In July 2012, it acquired Denzel Mobility CarSharing GmbH, a car sharing service in Austria, for an undisclosed price.
Zipcar boosted Avis' second quarter revenue by $76 million and pre-tax earnings by $6 million.
The transaction underscores the current competitiveness of the car rental market, pitting Avis against the rental businesses of rivals Hertz Global Holdings Inc. (NYSE: HTZ) and Enterprise Rent-A-Car. The Zipcar deal comes just months after Hertz paid $2.3 billion for Dollar Thrifty Automotive Group Inc. (NYSE: DTG), an auction process that Avis attempted to win.
Avis again grew its global footprint when it picked up Payless for $50 million in July. The St. Petersburg, Fla.-based company is considered the sixth-largest car rental company in the U.S.
The deal, according to Avis CEO Ronald Nelson, enables the company to improve its mid-tier brand positioning. Payless, which was founded in Spokane, Wash., offers "deals of the hour" and "last-minute deals" to more cost-conscious renters.
For Avis, the all-cash deal for Payless depicts the ideal illustration of the modern strategic M&A model in play as Avis was able to benefit from a number of synergies. With Payless under its ownership, Avis would be providing lower vehicle depreciation, reducing fleet interest expense and generating savings from combined administrative operations.