Transamerica Agrees to Sell Budget Rent a Car : Investment Banking Firm of Gibbons, Green to Pay $205 Million for the Unit
Budget Rent a Car, the nation’s fourth-largest car rental company, will be sold by Transamerica to an investment banking firm for $205 million as the first step in the insurance giant’s planned divestiture of non-financial holdings, it was announced Monday.
The purchaser is Gibbons, Green, vanAmerongen Ltd. of New York and Los Angeles, a specialist in leveraged buyouts. No details were available on financing, which hasn’t been completed, but top Budget executives are expected to become investors and to remain in their jobs.
Budget, which has been profitable every year since it was founded in Los Angeles in 1958, was considered the most attractive of the subsidiaries that San Francisco-based Transamerica has declared that it intends to sell.
Analysts welcomed the transaction, which was struck amid an improving rental car market and fetched what E. F. Hutton analyst Michael Lewis called an “excellent” price.
“We thought Budget would be the easiest sale, and this gets them off to a good start,” Lewis said.
That leaves the company’s airline unit, Transamerica Airlines, and its manufacturing subsidiary, Transamerica Delaval, still for sale. A spokesman said possible buyers have surfaced for both units, but analysts said neither would be easy to unload.
Transamerica, mirroring strategic changes at other conglomerates, announced in January that it intended to sell the three operations so it can pay more attention to its main businesses--insurance and financial services. The three units contributed 19% of Transamerica’s operating income last year.
Transamerica Chairman and Chief Executive James R. Harvey said the sale of Budget “strengthens Transamerica’s financial position for the planned expansion of its core insurance and financial services businesses.”
While that suggests plans to use the proceeds for acquisitions, insurance analyst Gloria Vogel of Legg Mason Wood Walker in New York said Transamerica needs to “clean up some balance sheets” and will probably use the money for that first.
“Then, if they see a hot acquisition prospect, they’ll grab it,” Vogel said.
Transamerica spokesman Richard J. Olsen said the New York firm of Meridian Partners has voiced an interest in acquiring the airline unit, which consists of about 25 planes providing passenger and cargo charter flights and other specialized services.
Transamerica has sold a dozen planes since 1983 and will sell the rest if no buyer is found for the ongoing business, Johnson said. Johnson said the outcome of the talks with Meridian Partners could hinge on negotiations with the unions that represent the airline’s employees. Meridian wants to slash labor costs to compete in the newly deregulated industry.
The sale of Budget will bring $205 million in cash and the assumption of the subsidiary’s debt, while Transamerica receives warrants to buy back up to 10% of Budget for up to $500,000 anytime in the next five years.
Transamerica said it will report an after-tax gain of about $50 million at the time of the closing, which is scheduled for Sept. 30. The deal is subject to completion of financing for the leveraged buyout, a form of purchase in which money is borrowed against the assets of the property being bought.
Gibbons, Green wouldn’t elaborate on the deal except to say that it will retain Budget’s current management and will fund expansion of the company, now based in Chicago.
Firms that specialize in leveraged buyouts often resell the companies that they buy. But Morris Belzberg, the longtime president and chief executive of Budget, said he has been told that won’t happen.
“They want us to grow the company. They have no intention of selling off any assets,” Belzberg said. He also said an unspecified number of top managers have been “invited” by Gibbons, Green to buy equity positions in Budget, “and we expect to.”
Rebound in Earnings
Budget set three consecutive profit records before slipping to $6 million in after-tax earnings on revenue of $332 million last year. That amounted to about 4% of Transamerica’s earnings and 6% of its revenue.
But Belzberg said that Budget is rebounding this year and that it will probably break its after-tax earnings record of $15.4 million set in 1984.
The company has 150,000 cars and trucks worldwide, and on that basis it claims to be the No. 3 car rental firm behind Hertz and Avis. In dollar revenue from the U.S. airport market, Budget is fourth behind National.
Budget’s new owner, which considers itself based in both Los Angeles and New York, was the first leveraged buyout firm when it was formed in 1968. One of Gibbons, Green’s biggest deals was the purchase of Purex Industries for $400 million in 1982.
The Budget buyout would be the fifth acquisition by Gibbons, Green in the last 12 months, the firm said, representing more than $1.1 billion in financing. The acquisitions included the $450-million purchase of the San Diego-based Foodmaker division of Ralston Purina, which operates the Jack in the Box restaurant chain.
THE RENTAL CAR MARKET Total estimated annual market: $3.75 billion Market share at U.S. airports, beased on dollar revenue for May
Hertz 31.3% Avis National 20.2% Budget 18.1% Other 5.0%
Source: Budget Rent a Car
