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Tickers in this Article: HTZ, DTG, CAR, F
After months of uncertainty, major car renter Hertz (NYSE:HTZ) now appears to have nailed down its takeover of smaller operator Dollar Thrifty Automotive (NYSE:DTG) with a sweetened offer. The deal, which was first announced back in April, see-sawed back and forth, as both companies wrestled with the issue of a potential anti-trust challenge arising from their merger, as well as a last minute bid from rival Avis Budget Group (NYSE:CAR).

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Hertz Boosts Bid to Acquire Dollar Thrifty
Avis' move to top Hertz's initial offer was probably the necessary inducement to nudge Hertz into increasing its bid to $50 per share, raising the total cost of the deal to $1.56 billion; a 40% increase from the initial bid value of $1.1 billion back in April. Another inducement in the deal, which targets Dollar Thrifty shareholders, comes in the form of a $44 million break-up fee payable to Dollar Thrifty should the deal fall apart as a result of anti-trust action on the part of the U.S. government. To minimize that risk, Hertz has put up for sale its low-cost rental unit Advantage Rent-A-Car. Dollar Thrifty shareholders will meet on September 30 to vote on the offer.

Hertz Looks to the Lower-End Market for Growth
By paying such a sizable premium for Dollar Thrifty, Hertz is tipping its hand as to where it sees future growth coming from. With competition for stagnating corporate travel business intensifying among the major car rental operators, the sole remaining growth opportunity appears to be in the discount end of the rental business, where cost-conscious consumers seem to be directing their business.

Discount Rental Market Continues to Experience Steady Growth
Neither Dollar or Thrifty are key corporate brands, but they kept Dollar Thrifty profitable during the slump in the auto rental business during 2009, and should see continued growth in 2010 with management predicting revenue growth of 2-4% to a total of $1.5 billion for the year. The steady growth character of Dollar Thrifty's discount business offers a welcomed degree of diversification that should help offset the volatility inherent in Hertz' core corporate business.

Cost Cutting Now Dominates Car Rental Business
Another consequence of the merger could be a further downsizing of the nation's rental fleet, which some analysts predict will lead to higher prices for car renters. The slump in air travel, the main source of car rental customers, has already prompted the industry to cut back on fleet upgrades through buying newer cars. As a consequence, renters are having to make do with older cars. This trend also has negative consequences for automakers like Ford (NYSE:F), whose dependence on fleet sales has increased in recent months as deep discounts have failed to spark a pick-up in sales to individual car buyers.

The Bottom Line
At $50 a share, the Hertz bid is seen as fair value by industry analysts. That suggests that the deal is likely to close at the end of this month. Any short-term gain experienced by Hertz as a result of having to raise its offer for Dollar Thrifty should translate into a long-term gain as the company should reap the benefits of acquiring the dominant share in key airport markets. The Hertz-Dollar Thrifty share in those key markets will now reach 38%, well ahead of Enterprise Car-Rental's 31% and Avis' 29%. (To learn more, see Credit Card Rental Car Insurance How To.)

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