Zipcar Inc. (NYSE: ZIP) rallied 48 percent last week on news that Avis Budget Group Inc. (NYSE: CAR) had placed an offer of $12.25 per share for the car-sharing company. This is equivalent to 49 percent premium on Zipcar’s share price before the offer.
On the other hand, Avis is looking to complement its car rental business, which is experiencing a slowdown due to rising gasoline prices. Reports suggest that car-sharing is actually gaining traction at an alarming rate thereby, cannibalizing on car rental services. Interestingly, Zipcar is the pioneer of car-sharing services in the U.S.
Other car rental companies like Hertz global Holdings Inc. (NYSE: HTZ) and Enterprise Holdings already enjoy a lion’s share of the market. They have already overtaken Avis in terms of market share, which now, lies third in the $22 billion, car rental business, in the U.S. The acquisition Zipcar will give Avis the access to car-sharing business without having to spend time on development of the business from scratch.
According to reports, Zipcar will be receiving approximately $500 million in cash proceeds from the deal, which Avis expects to fund from additional debt and available cash. Zipcar is expecting approximately $4 million in profits for the 2012 financial year and reported a 15 percent rise in revenues, in its most, recent quarter (third quarter) year-over-year to $78 million.
The deal will see Avis acquire Zipcar as a fully owned subsidiary, but Zipcar’s chief executive Scott W. Griffith and the president Mark D. Norman, along with the chief operating officer, are expected to stay on. In 2007, Zipcar was involved in yet another deal, which resulted in a merger with rival Flexcar.
Avis is very optimistic in terms of consequential benefits associated with the deal including cost reduction as well as savings on its fleet. Additionally Avis predicts that the monetary value of synergy benefits will be in the region of $50 to $70 million annually. The deal is well backed by Zipcar’s major holders including Benchmark Capital, Greylock Partners and the AOL co-founder Stephen Case’s Revolution, which holds 17.1 percent in Zipcar.
Zipcar was founded twelve years ago and already has more than 760,000 members, which it calls Zipsters. Its services are available in twenty metropolitan areas including the U.S, Canada and Europe and are located near college campuses. Zipcar’s car-sharing business draws a majority of its customers from the youth.
The deal has attracted two investment companies and two law firms for advisory services on the negotiating table: including Citigroup and the law firm Kirkland & Ellis for Avis while Morgan Stanley and the law firm Latham & Watkins are Zipcar’s advisors. This deal gives Avis and Zipcar one of the best opportunities to challenge the industry leaders, Hertz Global and Enterprise Holdings.
Zipcar Inc. (NYSE: ZIP) stock closed at $12.19 per share last Wednesday, up 48 percent while Avis Budget Group Inc. (NYSE: CAR) stocks closed at $20.64 per share, up 4.14 percent. Zipcar’s closing price is 32 percent below its 2011 IPO price of $18 per share.