Case: Bidding for Hertz: Leveraged buyout Case Solution
In what ways does Hertz conform or not conform to the definition of an “ideal LBO target
The first way to consider a company as a good or ideal target for leverage buyout is that the company has good financial performance and in the case of hertz the company has good profitability is past and the gorwing rate of revenue indicate the better position in market place. The annual compound growth rate of 7.6% is indicating the company has good current performance as well as better future prospects.
The customer base of the company is loyally and does not want to switch from their products. The company has another characteristic of ideal leverage buyout is that the company has good management team the management team has strong business knowledge as well as industry knowledge which leads top better strategies for business performance.
The better industry knowledge and adaptability skills of the management teams become the teams competitive in market place. The steady cash flow and predictable cash flows raises the chances to ease in repayment of debt principle as well as interest payment. The company has strong tangible asset which attract the debt finance as those assets had good second hand market for the bank or lenders.
The large tangible assets will easily use as collateral to attract the less costly debt or financing. Lenders are concerned over the repayment of the debt or loan and they can sell those collateral assets to cover up the loss in case of default by the borrower. The financing or the future cash flow is harder and more costly than collateral financing.
The acquire group can implement the new plans and strategies on the company to reduce the corporate cost and increases the value generating activities of the company. The potential of cost reduction is another characteristic of good leverage company. As the case indicates the company requires much operational improvement that can be executed by the acquirer group by implementation of new strategies and plans.
The company has two segment had has the numerous areas where it can save cost and increases its efficiency. Both of the company’s strategic segment generate good results the company has reputed brands. The company is one of the largest equipment rental companies in North American that indicate the strong market share.
The financing options and alternatives available to the company are very much attractive. The asset based securitization is essential for financial synergy. The revenue stream of the company can be increased through the changes in logical structure of revenue such as the length of each rental, number of transactions, and revenue per rental day.
Another segment of equipment can be improved through proper utilization of capital which is not currently the case at the segment. The expected return of the competitor are higher but the Hertz company expected return is lower the group has to ensure the higher return by making some changes as the industry has goods demand.
The annual operating cost savings and realistic revenue projection are useful for the acquirer Group. Lower level of capital requirement in the company makes the attractive investment opportunity as the little subsequent investment in working capital increases return of shareholders. All the above factors indicate the company meet the criteria for ideal leveraged buyout and attractive invest for acquirer Group.
How realistic are the key assumptions that underlie the bidding group’s projection in case Exhibit 8, 9 and 10? Which assumptions are most likely to have the largest impact on returns?
The average growth rate of revenue of RAC is 10% is the past but the projection just taken the 6% growth rate which is not reasonable for the calculation purposes. The reduction in growth rate will reduces the company prospects in valuation. The growth rate of revenue should be enhanced by the company is order to calculate realistic valuation…………………..
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