The short life of Zipcar (ZIP) as a publicly-traded company is now – mercifully for its investors – about to draw to a close thanks to the just-announced acquisition of the cash guzzling automobile timeshare company by Avis Budget Group (CAR). The good news? The business model that performed so poorly as a public company – Avis Budget will pay $12.25 a share, well below Zipcar’s $18 per share IPO in April 2011 – will do wonders once it’s part of the Avis Budget empire.
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Let’s start with the fact that Avis Budget is already doing quite nicely, thank you, benefitting from an upturn in travel. Zipcar’s revenues have grown even more rapidly over the last three years, although its revenue growth is half of that at Avis Budget in the last 12 months. Still, what Avis Budget is purchasing isn’t Zipcar’s existing book of business, but the brand name and business concept, which it can then market to its far larger customer base. Independently, Zipcar would have struggled to achieve the kind of market penetration that Avis Budget already possesses.
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True, Avis Budget investors have to tolerate a reasonably hefty debt load, but the debt-to-total assets ratio for the company has fallen over the course of the last year, even as that for Zipcar has risen. Analysts at Gimme Credit noted – even while downgrading their debt rating on the company from “improving” to “stable” as a result of increased leverage the transaction will create – that Avis Budget doesn’t have any debt coming due until next year, and views the company’s liquidity position as strong. Meanwhile, the company itself has said it expects to generate cost savings of at least $50 million a year thanks to synergies between the two businesses once the acquisition is complete. It’s hard to imagine, for instance, that it isn’t significantly cheaper for Avis Budget to negotiate the best deals with auto manufacturers when adding to its rental fleet than it has been for the much smaller Zipcar.
Perhaps best of all, however, Avis Budget has cash on its books. True, there is less of it than there has been in recent years, but its resources dwarf those of Zipcar. That means that as Avis Budget continues its European expansion, it will be able to take the Zipcar brand and business model along for the ride.
Avis Budget won’t be a stock for every portfolio. It trades at 17.5 times trailing 12-month earnings, above the average PE ratio for the S&P 500 index. It doesn’t pay dividends, so investors will have to rely on growth to generate returns. Moreover, it recently trimmed its full-year earnings forecast to reflect the sluggish business environment in Europe, where it is trying to expand the presence of its Budget value-priced brand. It had previously suggested it might earn as much as $2.65 a share for 2012; that upper range of the target was cut to $2.45. But history may prove that the company’s push to open more locations in countries like Spain at this point in time will prove far-sighted, as Spaniards turn to rentals as a cost-effective alternative to buying a new car.