Bidding for Hertz: Leveraged Buyout

Abstract

In August 2005, The Carlyle Group and its partners (Clayton, Dubilier & Rice, and Merrill Lynch Global Private Equity) must finalize the terms of a bid to purchase the Corporation. The Ford Motor Company had put Hertz, a wholly owned subsidiary, up for sale in April 2005, and in June 2005, entered a dual-track process, which would result in its sale or an initial public offering (IPO). The case provides detailed pro forma projections for the transaction that allow students to examine the synergies of the deal and estimate a value and bid for Hertz. Students must consider whether their bid provides an adequate return to the sponsors, can produce in a higher value for than an IPO, and can best that of a rival bidding group. The case is appropriate for use in courses on corporate finance, private equity, or deal valuation. Because of the rich range of issues that can be considered, the case also works well as a capstone case or in a case competition. For instructors wishing to provide students an overview of the role and practices of private equity, we recommend combining the LBO case with its companion case, Investing in Sponsor-Backed IPOs: The Case of Hertz (UVA-F-1561). The IPO was announced in July 2006 just seven months after the LBO was completed. The two cases cover a wide range of issues that arise over the course of entry and exit of private equity investments.