Ford Plans to Acquire Budget Car Rental Firm
Ford Motor Co., going against the tide in the auto industry, moved Thursday to expand its leading role in automobile rentals by acquiring Budget Rent a Car for an undisclosed sum.
The deal must be approved by federal antitrust regulators, who will decide whether Ford--already the world’s biggest player in the rental car business through its ownership of Hertz Corp.--would be too powerful in the U.S. market with control of Budget.
Ford said it will argue that the acquisition would not be anti-competitive because Hertz focuses on business travelers and Budget on the more economy-minded.
Ford already has a nonvoting stake in Budget through a $300-million investment it made in 1989, and also wields considerable influence as the supplier of 70% of Budget’s 133,000-vehicle fleet.
To complete the deal, Ford said it will forgive some loans to Budget and partly write down the 1989 investment. At the same time, to gain a controlling interest, it will acquire all of Budget’s outstanding common shares from investor John Nevins, former chairman of Firestone Tire & Rubber Co.
Ford declined to provide further details of the transaction. It did say, though, that the loan forgiveness and write-down will result in a $437-million charge against second-quarter earnings, which will be reported Wednesday. It said that will be more than offset by a $650-million one-time gain related to the recent public stock offering of Ford’s financial subsidiary, Associate First Capital Corp.
The Budget move comes as Ford’s domestic auto-building rivals--General Motors Corp. and Chrysler Corp.--are getting out of the car-rental business. That business has been struggling to make profits as vehicle costs have risen while rental rates stagnated.
Hertz has made money the last three years, but Lisle, Ill.-based Budget has clearly been a disappointment to Ford. The private company reportedly lost $125 million on revenues of $2.4 billion for 1995.
Budget has since undergone a management shake-up and is in the midst of a restructuring that Ford executives said will make Budget profitable by the end of this year.
“The rental car business can continue to be a good one for Ford,” said David McCammon, Ford’s vice president of finance. “The steps we are outlining today will allow Budget to realize its full potential.”
Industry analysts and Budget franchisees were upbeat about the announcement. They said Ford’s considerable financial clout would be helpful in putting Budget on a steady course.
“We are pretty excited about Ford taking a bigger role at Budget,” said Don Norwalk, treasurer of Team Rental Group, Budget’s largest franchisee, which serves most of Southern California.
Others saw the deal as a smart one that would give Ford a new avenue to expose consumers to its cars and trucks, an aid to managing Ford’s production planning and a means to provide a steady supply of good used cars to dealers.
“Ford has been very innovative,” said Jon LeSage, executive editor of Auto Rental News, a trade publication. “They seem to have a broader vision of controlling the life cycle of their cars than anyone else.”
The Big Three got into the car-rental business as part of a diversification effort in the 1980s. As car sales waned, they kept factories going by using costly incentives to entice the rental firms to buy the vehicles that consumers didn’t.
That glutted the market with low-mileage used cars, depressing new-car sales even further. Auto makers were thus prompted to curtail sales to the rental car companies, and that in turn raised the costs of those vehicles for the rental firms, which found it difficult to raise prices to consumers because of stiff competition.
The experience soured GM and Chrysler on rental companies. GM last year unloaded National Car Rental Systems and hopes to sell its 29% stake in Avis Inc. HFS, the nation’s leading hotel and real-estate franchiser, recently agreed to buy Avis for $800 million. Chrysler is looking to sell its Dollar Rent a Car and Thrifty Rent-A-Car Systems units.
Ford has taken a different tack. It bought a 49% stake in Hertz in 1987 and in 1994 acquired the rest. Hertz, which has the second-largest U.S. fleet (behind Enterprise) and the largest worldwide, is considered the class act of the business.
a Ford has had a major interest in Budget since 1989, when it provided the financing for a $340-million leveraged buyout. In return, it obtained nonvoting preferred stock.
As losses mounted at Budget, 500 employees were laid off, 20% of Budget’s salaried ranks, and fleet sizes were reduced. HFS shares fell 3.7% on Thursday amid concern that its agreement to buy employee-owned Avis could be delayed or derailed by the car rental company’s employees. A group of workers said Wednesday that they might get a better return for their shares in a public offering.
