Avis Employees Buy Firm in Record $1.7-Billion Deal
Avis Inc., the nation’s second-largest auto rental company, was sold to its employees through their employee stock ownership plan Monday for $1.75 billion in the largest deal of its kind in history.
The employees’ buyout set size records in terms of both dollars and number of employees involved, according to the ESOP Assn. of America, a Washington, D.C., trade group made up of employee stock ownership plans. The transaction continued a recent trend of huge buyouts of companies by their workers.
Avis, founded in 1946, rents 330,000 cars from 3,900 locations in 135 countries and handles 8 million rentals annually. It has about 21,000 workers worldwide, but only its 11,000 employees in the United States will take part in the buyout.
ESOPs allow employees to buy shares in their companies and even to take over firms on a tax-advantaged basis. They are being used increasingly to rescue troubled enterprises.
The sale of Avis, which has changed hands eight times in the last two decades, comes when Hertz Corp., the industry’s No. 1 company, is also on the auction block. Allegis Corp., which owns Hertz and United Airlines, among other companies, has said it will sell Hertz as part of a planned restructuring.
The deadline for bids for Hertz is today, and an Allegis spokesman said a large number of bids have been received. A decision on the sale is not expected immediately.
Hertz has roughly 33% of the U.S. car rental market to Avis’ 25%. Other major players in the industry are National, which has about 20%, and Budget, 16%. A number of smaller companies account for the remainder.
Avis, which has battled Hertz by billing itself as the car rental company that “tries harder,” will be improved by its purchase by employees, a number of observers said Monday, because it will no longer be owned by outsiders.
“I think that the daily (auto) rental companies are going to get reasonable stability when they are no longer owned by conglomerates, when they get interested, hands-on management. Their profits have shrunk, their returns have not been good (while they have been) . . . subsidiaries of large conglomerates,” said Edward J. Bobit, publisher of Automotive Fleet Magazine of Redondo Beach, Calif.
The employees’ buyout is also expected to improve Avis’ service--thus, its image with customers--because the transaction is so favorable to the employees.
“The employees will have the highest motivation that it is possible to create,” said Louis Kelso, who heads Kelso & Co., a San Francisco investment company specializing in employee stock ownership plans. “They will be motivated, they will be happy, they will be competitive.”
Kelso added that the new employee-owners of Avis “will be put on a track in which, if they do well, they will wind up with substantial capital estates, far more than they could acquire in any other way.”
Largest Similar Transaction
Before the Avis buyout, the largest previous similar transaction was the acquisition of Hospital Corp. of America by employees. After creating a new company called Health Trust, the employees got 104 of the 178 hospitals owned by Hospital Corp. for about $1.5 billion, according to David M. Binns, executive director of the ESOP Assn. That buyout was completed about two weeks ago.
Another employee buyout offer has been made that, if the deal is completed, would be much larger than the Avis and Hospital Corp. transactions: The pilots of United Airlines have offered to purchase the carrier from Allegis, and price estimates are as high as $4 billion.
Joseph V. Vittoria, Avis’ president, was elected chairman and chief executive of the firm, it was announced Monday. He succeeds J. Patrick Barrett, who resigned to “pursue other interests.” Vittoria, who had been president of Avis since 1983, once served in the same capacity at Hertz and has spent his entire business career in the auto rental business.
“This is a great day for Avis and its employees,” Vittoria said. “We can now put all our efforts into running the company effectively, with everybody participating as owners.”
Vittoria said Avis’ stockholders almost certainly could have sold the company for a higher price to a third party. “But Avis management and the owners were convinced that employee participation in the ownership of the company should be a major criterion in the sale,” he said.
Avis was sold to the employees by Wesray Capital Corp., a privately held company specializing in leveraged buyouts. Wesray investors, including Avis management, acquired Avis in July of last year for $1.6 billion. (In a leveraged buyout, the buyer borrows the money needed to finance the acquisition and uses the target company’s assets or earnings to repay it.)
Since buying Avis, Wesray has sold 65% of the company’s European operations in a public offering for about $255 million and all of the company’s car-leasing division for $134 million.
Vittoria said most of the financing for the purchase by the employees’ stock ownership plan will come from $1 billion in loans, using Avis’ fleet of cars as collateral, extended by a group of 30 banks led by Irving Trust Co. of New York. Another $395 million will be lent by General Motors Acceptance Corp., Chrysler Credit Corp., and Pittsburgh National Bank.
