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Wednesday, January 2, 2013

Avis (CAR) to Buy Zipcar for $500 Million

Car-sharing service Zipcar (ZIP) changed the car-rental business, but its hourly-rentals to young and more urban customers turned out to be a lousy business.

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The company signed up more than 760,000 members since its founding in 2000 but struggled to post a profit. On Wednesday, it agreed to sell itself to Avis Budget Group Inc. CAR +4.77% for $12.25 a share, well above its recent price but below its $18 IPO.

Avis's bid is a 49% premium to the car-sharing-network operator's Monday close but a 32% discount to Zipcar's initial public offering price. Zipcar went public in April 2011 and shot as high as $31.50 in its debut. But the shares have never closed above $30, and have languished below $10 since Zipcar reported its second-quarter results last August.

The deal would vault Avis ahead of its peers in addressing the niche hourly rental market, which has grown to nearly a $400 million business domestically, Avis said.

"As some of you may recall, I've been somewhat dismissive of car sharing in the past," Avis Chief Executive Ron Nelson told analysts during a conference call. "But what I've come to realize is that car sharing, particularly on the scale that Zipcar has achieved and will achieve, is complementary to our traditional business."

Zipcar shares soared 49% to $12.24 in recent trading, while Avis was up 5.6% to $20.92.

Zipcar has said the car-sharing market could reach $10 billion in North America, Europe and Asia. Its ability to recruit members in the U.S. and Europe led closely held Enterprise Holdings Inc. and Hertz Global Holdings Inc. HTZ +2.67% to offer competing car-sharing services.

A year ago, the company acquired a majority stake in Catalunya Carsharing SA, known as Avancar, which operates a fleet of vehicles in Barcelona and Sant Cugat del Valles. Earlier it entered the London market with an acquisition of Streetcar, that city's largest car club.

Zipcar sales have notched double-digit percentage gains in each quarter since the company went public in 2011, as membership and usage increase and the company entered new markets in the U.S. and abroad.

But sales growth has slowed and profitability has been a greater challenge for Zipcar which posted losses each year since it was founded. That trend was poised to end in 2012, when a strong third-quarter report in November led Zipcar to indicate it was on track to record a full year of profitability.

When Zipcar went public, its biggest investors included former AOL Inc. AOL +2.36% chief Steve Case's investment firm, Revolution Partners, which owned about 20% of Zipcar as of August. Mr. Case serves on Zipcar's board.

The Zipcar bid is Avis's largest deal since it spent roughly $1 billion in October 2011 to take full control of Avis Europe. Avis also had sought to acquire Dollar Thrifty, though it later backed away from an extended bidding war with Hertz, which closed on its acquisition of Dollar Thrifty late last year.

Mr. Nelson said Avis could help Zipcar achieve better profitability by leveraging Avis's fleet and infrastructure, as well as offer more vehicles during peak rental periods.

Avis expects the deal to lower the companies' combined costs by $50 million to $70 million a year. Mr. Nelson said the synergies were tied to three components: lower fleet costs, better fleet utilization and increased revenue by targeting corporate clients, one-way rentals and airport bookings.

Mr. Nelson said Zipcar utilization is low during the weekdays but spikes during the weekends, resulting in excess fleet during the week that often isn't used. Avis, meanwhile, has utilization that peaks during the midweek commercial travel period and has excess capacity on the weekends.

The deal would allow Avis to reduce the amount of cars at Zipcar locations during the week, but also to use Avis's excess weekend inventory to meet Zipcar's strong weekend demand.

Avis expects Zipcar to increase its adjusted earnings in the second year after the deal closes, which is targeted for the spring. Avis also backed its 2012 guidance.

Zipcar board has unanimously backed the deal, and shareholders representing about 32% of the shares outstanding have agreed to vote in its support.

The agreement prohibits Zipcar from seeking any other bids and has set the termination fee at $16.8 million.

Zipcar may provide information and hold talks with a third party that makes an unsolicited acquisition proposal. But Avis has three business days to adjust terms of its agreement if Zipcar's board determines another proposal constitutes a superior bid.

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