It didn't take long for investors to see the first deal of 2013, and it's an interesting one. Rental car giant Avis Budget (Nasdaq:CAR) is acquiring Zipcar (Nasdaq:ZIP) in an all-cash deal that will vault Avis into the car sharing market, while ending an emerging growth story that was marked by both significant potential and unrealized expectations.
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The Deal to Be
Assuming that the deal goes through, Avis will be acquiring Zipcar in an all-cash deal worth more than $490 million. At $12.25 per share, Zipcar shareholders are getting a roughly 49% premium to last year's close.
There are a few different ways to assess this deal. On one hand, while this take-out price is at an almost 50% current premium and more than doubles the company's early November lows, it's a far cry from the high $20s seen on Zipcar shares back in 2011. On the other hand, the deal represents a greater than 30 times multiple to likely 2012 EBITDA (even as adjusted EBITDA rose 42% in the third quarter and analysts are looking for 25 to 50% growth in EBITDA in the coming years).
What Avis Is Getting
Zipcar has been one of the pioneers of what is called "car sharing." In essence, car sharing is an answer to the high costs of car ownership in urban areas and the reality that urban dwellers don't make active use of their vehicles during the week (many of those in cities like New York and Washington who own cars still use public transportation for commuting to work and/or nearby errands).
With car sharing, members can get access to cars only when they need them and not pay for access they do not need or cannot use. Traditional car rental services like Avis, Hertz (NYSE:HTZ) and Enterprise charge by the day and so a person who needed a car for just a few hours is stuck paying a full-day rate. With Zipcar, though, the user can pay by the hour - leading to potentially substantial savings.
Zipcar didn't invent the car sharing concept in 2000, but they were among the first to approach it with a serious business model, and the company was arguably the first to achieve legitimate scale with the concept. Since then, however, rivals like Hertz, Enterprise and U-Haul have entered the market. That has put pressure on the company, and the shares have weakened on concerns relating to slower member acquisition (and the cost of that acquisition), slower usage growth patterns and overall profitability.
Why Do This Deal?
This could be an interesting growth opportunity for Avis, and one that is arguably less tied to the economically-sensitive business travel and leisure travel rental car markets. For starters, Avis brings a much larger fleet to the table, and this arrangement could be an answer to an overlapping problem - Zipcar has been held back, in part, by not having enough cars for the weekends, while rental companies like Avis are often stuck with excess inventory on weekends (when business travel is down).
I do wonder, though, if Avis will maintain some of what helped Zipcar stand apart. Zipcar has long since known it can't compete with rental car companies on fleet costs, so it has instead looked to compete on the quality of its IT systems and the "user experience" - making sure that people get the cars they want, when and where they want them and without a lot of hassle.
As anybody who has done a lot of business travel can attest, customer service and logistics are not generally where the rental car companies outperform. Consequently, I will be curious to see how Avis handles Zipcar's differentiated back office capabilities and how it integrates/maintains the "face" of Zipcar with the advantages and needs of Avis.
SEE: Analyzing An Acquisition Announcement
Is This a Good Deal?
I suspect that long-suffering Zipcar shareholders who have ridden this name down into the single digits will argue that this deal significantly undervalues Zipcar.
At the risk of stating the obvious, that question hinges on what you believe Zipcar's likely revenue trajectory is going to be. Earlier in 2012, Zipcar surprised and disappointed the Street with an unexpected revenue growth slowdown and many analysts slashed their long-term growth rate assumptions as a result.
On the basis of a long-term revenue growth rate near 10% and a long-term free cash flow margin in the low-to-mid teens (which seems generous given the company's fleet needs to support that revenue growth), I believe the shares are worth around $11 - arguing that this is a very fair deal. Bump that revenue growth assumption to 12% (and hold the margin steady), though, and the fair value jumps to $14.
The Bottom Line
While Avis does keep the upside if Zipcar's growth re-ignites, it also takes on all the downside that Zipcar cannot improve its customer acquisition costs or utilization rates. All in all, I believe this is a fair deal for both parties - it de-risks an unproven model for Zipcar shareholders, while giving Avis a new growth opportunity.
At the time of writing, Stephen D. Simpson did not own any shares in any company mentioned in this article.
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