Summary
- Hertz announced $750mn rights offering at $12.95, a 20% discount to the closing price.
- Deleveraging, substantial interest savings, and cash flow improvement are the main triggers that led to the rights offering.
- Additionally, disappointing stock performance could have forced Hertz to address the issue of higher leverage while allowing existing shareholders to participate in the likely upside.
- Rights offering at a time of favorable business momentum (company provided strong 2Q guidance) provides the company with capital structure flexibility to address future business needs.
- While we think Hertz's deleveraging efforts are positive, at 19x fwd PE, the stock may have already priced this in.
We believe Hertz (HTZ) is making good progress at present, as the company's business and capital restructuring efforts are likely to pay off in the near future. The rights offering de-risks the balance sheet and improves free cash flow generation, which should substantially strengthen the financials of the company. However, the stock is currently trading at ~19x forward earnings, which seems lofty given the challenging operating environment. Though the rights issue eases the debt burden and improves earnings and cash generation on the back of lower interest expenses, Hertz stock is simply too pricey at current levels.
1Q 2019 result surpassed expectations
For 1Q 2019, Hertz reported total revenue of $2.1bn, representing a yearly growth of 2% and a loss of $0.99 per share on an adjusted basis. For the same period last year, it posted a loss of $1.58 per share. Adjusted Corporate EBITDA was a negative $4mn compared to negative $59mn for 1Q 2018.
Despite the losses, the results indicated that Hertz's strategy of higher investment spending and cost reduction adopted over the last two years may be paying off. The fleet and revenue management issues that hindered the company's growth for many years are a thing of the past. With operational stability within reach, the company is focusing on three growth areas - TNCs (transportation networking companies), delivery, and subscriptions.
Surprising rights offering
On June 13, Hertz announced a rights offering to raise up to $750mn. Each common stockholder will have the right to purchase 0.688 shares at $12.95, a 20% discount to the closing price. The company plans to use the proceeds to deleverage, mainly the 5.87% senior unsecured notes due October 2020 and 7.375% senior unsecured notes due January 2021. Key dates below:
Source: Prospectus
The Icahn Group, which currently holds 28.84% of outstanding shares of Hertz, has expressed support and "intends to exercise fully all basic subscription rights and over-subscription rights allocated to them in this rights offering."
