An IPO in Overdrive

Hertz's Offering Completes a Pedal-to-the-Metal Private Equity Turnaround

Hertz expects its shares to fetch $16 to $18 in the IPO. (By Richard Sheinwald -- Bloomberg News)

Car rental company Hertz Global Holdings Inc. plans to go public this week in a move that could test the rapid-turnaround approach that private equity firms have taken to wrest profits from some of their investments.

The stock offering, slated for Thursday, comes less than a year after three private investment funds, including Washington's Carlyle Group, bought Hertz from the struggling Ford Motor Co. for $15 billion -- putting up $2.3 billion of their own money and loading up Hertz with more than $12 billion of debt to pay the balance.

Already, Hertz's three owners have paid themselves a $1 billion dividend and plan to use more than $400 million of the $1.6 billion in anticipated IPO proceeds to pay themselves another one. And, after the stock sale, the three investors will still control nearly three-quarters of Hertz, which would be valued at about $18 billion, including about $12 billion of debt.

The debt Hertz took on in the leveraged buyout and to pay dividends took a big chunk out of its bottom line. In its IPO filing with the Securities and Exchange Commission yesterday, Hertz said its net income in the first nine months of the year fell 77 percent, to $76.1 million, after its interest costs nearly doubled.

"It's hard to understand what they could have done materially to improve the performance of this company," said James Rosenfeld, a finance professor at Emory University's Goizueta Business School.

A spokesman for Carlyle, citing securities regulations that discourage companies from discussing IPO matters beyond what they report in SEC filings, declined to comment.

The quick turnaround is unusual for private equity firms, which typically take more than three years to restructure companies before offering them up for sale in an IPO or to another buyer. But the corporate loan market has been so ready with cash for private equity deals and the strong stock market so inviting, private equity investors are increasingly able to pull their initial investment out rapidly and still leave ample room for big returns down the road.

Quick turnarounds have met with mixed success in the past. Foundation Coal Holdings Inc., based in Maryland, raised $519 million in a 2005 IPO after being taken under the wing of private investors for only five months. Much of the success was because of skyrocketing coal prices.

Stock in Burger King Holdings Inc., which went public in May, dropped significantly in the three months after its debut but has since rebounded.

Ford had considered spinning off Park Ridge, N.J.-based Hertz last year, but numerous private investors jumped in, drawn to Hertz's cash flow and tangible assets that allow the company to get outside loans.

In returning Hertz to the public sphere, the three private equity firms -- Clayton, Dubilier & Rice Inc. and Merrill Lynch Global Private Equity joined Carlyle in the leveraged buyout -- will retain 72 percent ownership of the company. And that's after collecting more than half of their initial investment in the form of dividends and fees.

"What's mainly going on here is that in the last 12 months, the stock market is up 18 percent," said Jay R. Ritter, a finance professor at the University of Florida. The gain in the market makes Hertz more valuable, which makes it easier to borrow and "amplifies their gain, so they've decided, 'Let's cash out now.' "

Some private equity experts said that with the stock market trading at record levels, it's probably the best time for private investors to get a return. And, as in the case with Hertz, the private equity investors still have a powerful motivation to increase shareholder value because they still own most of the stock.

"For companies that go public that are owned by private equity, the vast majority of the remaining stock ownership is with the private equity fund. . . . They are very interested in the future public performance," said John O'Neill, head of private equity at Ernst & Young.

The Hertz IPO is the biggest stock offering on tap during a heavy IPO week.

KBR Inc., the largest contractor in Iraq reconstruction projects, is set to go public tomorrow when parent Halliburton Co. spins it off in an offering expected to generate more than $400 million. Nymex Holdings Inc., which owns the New York Mercantile Exchange, and energy companies Venoco Inc. and First Solar Inc. also plan initial stock offerings.

Hertz's offering, about 88 million shares, is intended to be priced at between $16 and $18 a share.