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Hertz Rises on Adopting Poison Pill

Zacks Equity Research

The largest publicly traded U.S. rental-car company, Hertz Global Holdings, Inc. (HTZ) had adopted a one-year shareholder right plan to prevent activist investors from completely taking it over. The decision to adopt a shareholder right plan – also known as poison pill – came after the company realized certain unusual and substantial options activity in its shares.

As per the plan, the company is entitled to issue one preferred share purchase right for each outstanding common stock after the close of business on Jan 9, 2014. The rights will be exercisable only when a person or group acquires 10% of the company’s common stock. However, for institutional investors, the exercisable limit is 15%.

The poison pill reduces chances of gaining control over a company by any person or group through accumulation of shares in the open market without appropriately compensating shareholders.

Hertz expects the above plan to facilitate in increasing shareholder value through on the execution of strategic initiatives. The company’s long-term strategic initiatives include the integration of Dollar Thrifty, expansion Hertz's off-airport footprint, introduction of new brands according to consumer needs, roll-out of new rental technology and the company's Lean cost management programs. Apart from this, Hertz is considering a revision in its operating structure and capital allocation to drive long-term growth.

The news generated positive sentiment among investors, which was reflected in the stock’s price on the following day. Shares of Hertz reached a new 52-week high of $28.90 on the last trading day of 2013 before closing trade at $28.62, approximately 10.5% higher than the previous day’s closing price. In 2013, Hertz shares rose over 70% primarily driven by its improving prospects while its peer, Avis Budget Group, Inc. (CAR) shares surged 95%.

Furthermore, we believe that the recent momentum in the company’s share price benefited from a rebound in leisure and business travels owing to recovery in the U.S. economy and increased spending by individuals.

However, at present, this leading airport car rental brand in the U.S. with presence at 120 major airports in Europe holds a Zacks Rank #5 (Strong Sell). Some better-ranked stocks in the same industry include SouFun Holdings Ltd. (SFUN) and Core-Mark Holding (CORE). While SouFun has a Zacks Rank #1 (Strong Buy), Core-Mark carries a Zacks Rank #2 (Buy).

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