Skift Take

It will certainly be a challenge to transform Hertz's business. However, the car rental company is not only getting a financial lifeline, but also an assist from private equity firm Certares' wide-ranging travel rollup strategy. This will be a long-term play.

Private equity firms Certares Management and Knighthead Capital Management are teaming up to lead Hertz out of Chapter 11 bankruptcy by July through a $4.2 billion reorganization plan endorsed by the beleaguered Florida-based car rental company.

The two firms are co-sponsors of a reorganization plan, which Hertz Corp. filed Tuesday morning in the U.S bankruptcy court in Wilmington, Delaware. The deal is subject to the approval of creditors and the court.

The 102-year-old Hertz filed for Chapter 11 in May, brought down by the standstill in travel from the pandemic.

Certares and Knighthead would hold at least a 51 percent stake in Hertz, and have a majority of the board seats. No major management changes are in the offing in the reorganization plan that was negotiated with Hertz.

Creditors can opt to receive 70 cents on the dollar if they wish to cash out or they can roll over their Hertz shares under the new ownership structure. The size of the deal could range from $2.4 billion to $4.2 billion, depending on how many creditors take the cash.

Certares is a major travel investor, and has been rolling up assets in business travel, airlines, online and offline travel agency businesses, cruise, and tour operators.

For example, Certares is a joint venture partner in American Express Global Business Travel, owns Internova Travel Group, formerly called Travel Leaders Group, and is a strategic investor in Tripadvisor’s parent company, among other travel holdings. Certares and Knighthead have teamed in the past to co-manage investments in Latin American airlines Latam and Azul.

Deleverage, Predictive analytics, and Rebrand

Certares and Knighthead, if they win bankruptcy court approval for the reorganization plan, would first seek to deleverage Hertz’s debt and place it on a solid financial footing, Skift has learned. Hertz had about $19 billion in debt in 2019 — much of it secured — before Covid-19 decimated the airport-dependent car rental business.

With broad parallels to how it is wielding its travel assets to jumpstart Tripadvisor’s new subscription plan, Certares would leverage the data trove it has access to from across its travel holdings to try to overhaul the logistics of Hertz’s business based on predictive analytics.

One investor outside of Certares said that approach is “atypical” for private equity firms, and innovative.

One goal is to improve the mix of car types in Hertz’s fleet, and to get them to the proper rental location with optimal timing based on demand. The cars in Hertz’s fleet are too expensive to own, and often are not coveted by potential customers, according to sources involved in the deal.

Even before Hertz exits bankruptcy, some sort of new advertising could take place, perhaps repurposing some of Hertz’s iconic advertisements over the years. Hertz’s trove of TV commercials featuring disgraced former football great O.J. Simpson would obviously be excluded from these plans.

A long-term goal would be to retool Hertz’s distribution strategy, and to give customers a reason to feel more loyal to the Hertz brand. Corporations typically have several preferred car-rental brands in their managed travel programs, and road warriors may be more concerned about obtaining the right car at an attractive price point than having great car rental brand allegiance.

The aim, according to an investor source, would be to engender loyalty for Hertz among business travelers, and seek to have that brand affinity carry over when they are renting cars for leisure travel.

Any incursions into the car rental market from ridesharing firms such as Uber and Lyft don’t appear to be an overriding concern for the new investors, who may view car rentals and ridesharing as different use cases for their respective customer bases. The thinking goes that the car rental business has been able to grow alongside ridesharing, which doesn’t represent an existential threat.

That may be understating the challenge, however, with some observers seeing increasing convergence in the two sectors.

Hertz currently has a program to rent cars to Uber and Lyft drivers.

Chapter 11 in May

Hertz Global Holdings and some of its U.S. and Canadian subsidiaries filed for Chapter 11 bankruptcy protection May 22 after its business got obliterated during the pandemic. The company, which was highly reliant on car rentals at airports, had $19 billion in debt, and 38,000 employees at the end of 2019, according to CNBC.

Hertz’s main international operating regions, including Europe, Australia and New Zealand, and its franchised locations, were not part of the May bankruptcy filing.

When Hertz filed the voluntary bankruptcy petition in May, it had $1 billion in cash on hand. Its North American and international businesses have kept operating in the interim.

Hertz laid off about 10,000 employees in May, and Paul Stone stepped into the CEO role, replacing Kathryn Marinello. The car rental company was highly leveraged with $14 billion in secured debt, and some $19 billion in total debt.

Activist investor Carl Icahn, who had been Hertz’s largest shareholder, sold his 39 percent stake in Hertz soon after the bankruptcy filing, and lost around $2 billion in the transaction.

Unlike the Certares-Knighthead tandem, Icahn never wielded majority control of the car rental firm, which also owns the Thrifty and Dollar brands. Hertz operates the three brands in North America, Europe, the Caribbean, Latin America, Africa, the Middle East, Asia, Australia and New Zealand, the company says.

Hertz reported last month that its global revenue in December was double that of April at the height of the pandemic. For full-year 2020, Hertz notched a net loss of $1.7 billion on revenue of $5.3 billion, a 46 percent decrease compared with 2019.

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Tags: bankruptcies, business travel, certares, chapter 11, hertz, knighthead, leisure travel, private equity

Photo credit: A Hertz location at Dallas-Fort Worth International Airport in Texas on December 31, 2019. Two private equity firms filed a plan March 1, 2021, to take Hertz Global Holdings out of bankruptcy. AutoRentals.com / Flickr.com

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