Ending weeks of speculation that it was about to divest the car rental unit, RCA said Monday that it has tentatively agreed to sell its Hertz subsidiary to UAL Inc., Chicago-based parent of United Airlines, for $587.5 million cash.
The proposed sale, which has been approved by UAL directors but needs final approval of the RCA board and federal regulators, was hailed by Wall Street analysts who said that Hertz will mesh well with UAL's airline and hotel operations and that customers should notice little difference in operations of the nation's largest vehicle rental and leasing concern. RCA has been restructuring itself in recent years to focus on its principal businesses in entertainment, communications and electronics.
"This gets RCA out of the driver's seat," said Mark Riely, an analyst at F. Eberstadt in New York. Robert J. Joedicke, analyst at Shearson Lehman Bros., agreed. "This makes a lot of sense" for UAL, he said, which is striving to become a full-service travel company.
Talks Began 9 Months Ago
Although the announcement came just three days after a settlement was reached Friday in the monthlong strike by pilots against United Airlines, both companies said disclosure of the deal was not withheld until the labor dispute was resolved. The companies said talks about the possible sale of Hertz were initiated nine months ago when UAL Chairman Richard J. Ferris approached Thornton F. Bradshaw, chief executive of New York-based RCA.
In the middle of United's strike earlier this month, UAL said it planned to convert for corporate use $962 million in pension funds not needed for the employees of its United Airlines subsidiary. Although apparently unrelated to the strike, the cash obtained from the move strengthened United's ability to survive the strike, which analysts estimate cost the company $5 million a day. But the move also fanned speculation that UAL was about to make an acquisition to dispose of excess cash and make itself less vulnerable to takeover artists such as Carl C. Icahn, a New York investor who was recently outbid by Texas Air in his effort to take control of Trans World Airlines.
The sale of Hertz, which is expected to be completed within several weeks, will bring RCA's total cash or equivalents to a fat $3 billion, which has caused talk that the company may be about to make an acquisition of its own in one of its principal business area.
Price War Cuts Profits
RCA, which also owns National Broadcasting Co., announced in 1982 that it intended to concentrate on "core" businesses and therefore was putting Hertz, which it acquired in 1967, up for sale. But, when bids fell as much as $300 million short of the $700 million or more that RCA had hoped to get for the car rental unit, it yanked it off the market in late 1983.
Another reason that RCA has wanted out of the car rental business has been a yearlong price war in the industry that has reduced profits. Analysts estimate that Hertz's book value as of March 31 was $441 million.
If UAL buys Hertz, its next task will be to withstand the price war in the rental market. Hertz employs 30,000 people, has 1,800 car rental stations in the United States (4,500 worldwide) and more than 400,000 vehicles. Its 1984 pretax profit of $50 million was down 25% from the year before on sales of $1.44 billion. Hertz accounted for 15% of RCA's pretax profits and more than 10% of its revenue last year.
Analysts praised Hertz as a well-run, efficient company even though its profit margins have been squeezed in recent years by growing competition by discount car rental companies such as National and Budget and by changing regulations that increased competitors' access to customers at airports, where most cars are rented.
In the last two weeks, RCA's stock has been rising on speculation that the company had either finally found a buyer for Hertz, was about to make an acquisition in one of its core business areas, or both.
In addition to speculation that it was about to sell Hertz, RCA has figured prominently in rumors that Apple Computer was about to be purchased by a major electronics or information company. RCA has refused to rule out an acquisition of Apple or an alternative company that would bolster RCA's entry into the home and business desk-top computer market. Analysts say RCA's rationale is that the desk-top computer industry eventually will merge with television electronics, a market in which RCA is a leader.
Last year, RCA sold its CIT financial-services division to Manufacturers Hanover for about $2 billion. With Monday's sale of Hertz, only Coronet Industries, a carpet maker in Dalton, Ga., remains as an RCA division outside its targeted business areas. The company has said that it intends to sell that company as well.
UAL announced last month that it plans to spin off its Westin Hotels subsidiary into a series of partnership trusts to raise an undisclosed amount of cash. Under the plan, UAL and Merrill Lynch Capital Markets will form several partnership trusts, the first of which will buy two or more of the hotels for as much as $500 million in cash. The cash presumably will be used to finance the Hertz acquisition.
Times staff writer Robert E. Dallos contributed to this story. HERTZ AT A GLANCE World's largest vehicle renting and leasing organization, Hertz and its licensees operate a fleet of nearly 400,000 cars and trucks in more than 120 nations. It was acquired by RCA in 1967 for $248.4 million.