The coronavirus threatens not only people but also companies. While among people the risk group is comprised of those with weak immunity and chronic diseases, among companies, those with the largest debts and erratic management face the gravest risk.
The services industry is extremely stressed by the pandemics, and some companies have to file for bankruptcy to fight back their creditors. In this situation, creditors look like the evil force, as if they do not allow delays of payments and push companies towards bankruptcy. However, the reality is different.
Today, I will speak about a victim of COVID-19: the largest US car rental company owning over 750,000 cars - Hertz Global Holdings, Inc. (NYSE: HTZ).
- Hertz Global Holdings
- The appointment of Mark Frissora
- Merging with Dollar Thrifty Automotive Group Inc.
- Resignation of Mark Frissora and financial manipulations
- Carl Icahn becoming a Hertz stockholder
- John Tague replaced by Kathryn Marinello
- Carl Icahn losing billions and killing the company
- The government refused to support Hertz
- Prices fall on car auctions
- Creditors rejected a compromise
- What to do with the stocks?
- What happens to the company?
Hertz Global Holdings
The company was founded in 1918 and survived several crises, but the current crisis defeated it. Problems began is 2005, when Ford sold the company to two private stock companies from Merrill Lynch & Co.
The appointment of Mark Frissora
Just a year later, the post of the director-general was given to Mark Frissora, who had been managing Tenneco (NYSE: TEN), achieving the growth of its income by 39% to 4.4 billion USD.
In Hertz, it decreased its expenses, guided it through the world financial crisis of 2008, and increased the market share of the company by acquiring Dollar Thrifty Automotive Group Inc.
Merging with Dollar Thrifty Automotive Group Inc.
This merging was meant to save 100 million USD for the company, but in reality, Hertz spent 70 million USD on the integration of Dollar Thrifty Automotive. The car park increased, and so did its life-cycle cost. This led to an increase in the useful life of cars for rent.
The average life cycle of a car in this sphere is 30,000 miles but in Hertz, it started reaching 50,000 miles, which meant more expensive maintenance.
Resignation of Mark Frissora and financial manipulations
The profit started to decline, and Frissora had to save it, so, judging by the lawsuits, he decided to manipulate the accounting reports (however, his fault was not completely proved). Anyway, it resulted in a huge scandal and an investigation.
Frissora's knowledge was enough to guide the company through the world financial crisis, increase its share in the car rental market, and avoid large debts. Unfortunately, the profit started falling, the company faced the investigation of financial manipulations, and Frissora had to quit his post. He is said to have left the company in 2014 for personal reasons, however, rumors go that his resignation was influenced by a billionaire Carl Icahn.
Carl Icahn becoming a Hertz stockholder
In 2014, the company attracted the attention of a famous billionaire Carl Celian Icahn. He bought about 39% of the company's stocks and achieved Frissora's resignation, promoting John P Tague to his place. Tague, in his turn, started modernizing the car park of Hertz, preferring cross-country vehicles.
Icahn's interfering with the company became the turning point on the company's way to the bankruptcy.
The company's debts started growing in 2015. The rental of cross-country cars was more expensive for the clients, so they started leaving for the company's rivals. The life-cycle cost grew even more because 4x4s cost more and require more maintenance than sedans.
In the end, to cover up the expenses, Tague rose the rental fee for all vehicles, hoping that his rivals would follow. However, Avis and Enterprise Rent-A-Car (the competitors of Hertz) did not raise the prices, attracting even more clients. Hertz's position became even worse.
John Tague replaced by Kathryn Marinello
In 2017, Tague left his post, having increased the company's debts to 18 billion USD, while its assets amounted to 20 billion USD. His post was taken by Kathryn Marinello.
She decided to reduce the car park, which yielded good results. The company started showing a net profit. However, good times did not last: Hertz had new rivals, specifically Uber Technologies Inc (NYSE: UBER) and Lyft (NYSE: LYFT). They started capturing the market swiftly, and by the end of 2018, the annual profit of Hertz became negative.
Hertz kept working under Marinello's management, just a week before filing for bankruptcy, she stepped down. The company is now managed by Paul Stone who was previously executive vice-president of Hertz.
Carl Icahn losing billions and killing the company
Sometimes I hear from traders that as soon as they open a position, the price reverses and counters them, so they consider themselves unlucky. Believe me, even billionaires face such situations, but they take it as a lesson to learn.
Carl Icahn is a bright example. In 2014, he bought the stocks, when they cost more expensive than ever. Since then, they have fallen from 126 USD to 40 cents per stock. Icahn sold 55 million stocks per 72 cents each. All in all, his loss reached 1.7 billion USD. This may be called the worst trade possible - buying at the highs and selling at the lows.
In the end, Icahn's coming to the company was not only his mistake - it was the company's fault to do his bidding.
The government refused to support Hertz
The manipulations with financial accounts had their effect when the company asked the authorities for financial help and, naturally, got refuse. The only remaining way to make money during the pandemics is to sell cars. Hence, in April and May, Hertz became the largest supplier of used cars in the US market.
Prices fall on car auctions
An evil chance seldom comes alone: during the pandemics, the number of buyers on car auctions decreased, dragging down prices. Some cars that would previously be sold for a couple of thousands of dollars were sold for 30 USD.
Creditors rejected a compromise
The company's creditors realized that they might receive nothing, but initially, they never put pressure on the company.
On May 4th, Hertz had to pay off 500 million USD; it had the money (the company has 1.5 billion USD free). However, the management asked for a delay until May 22nd, and the creditors agreed. Nevertheless, on May 22nd, the company refused to pay the debts again. That time, the creditors did not agree for a delay. The company's management replied by paying 16 million USD as bonuses to the key managers and announced bankruptcy several days later. No comments, as they say.
What to do with the stocks?
As for the Hertz stocks, currently trading at a very low price, may not be regarded as an investment instrument. Of course, there is a probability that the stocks will keep on trading, and you will make some profit on them, but this probability is less than one percent.
On May 26th, the New York stock exchange initiated the process of exclusion of the Hertz stocks from the list of trading papers. It means, if you have a position with Hertz, it will be closed at the market price on the day of the exclusion. If many stockholders decide to risk, the price will fall to zero. A couple of cents will be the best price. There are no reasons for such a risk.
What happens to the company?
Very large companies have such an intricate business structure that sometimes we need a whole investigation to find out how such a complicated organism works.
Hertz Global Holdings is the holding company of its subsidiaries: Donlen Corporation, Dollar Thrifty Automotive Group, Advantage Rent a Car, Hertz Car Sales, Dollar Rent A Car, and Daimler Hire working all over the world. The bankruptcy will affect only Hertz Global Holdings in the US and Canada, the subsidiaries will go on working.
The largest creditors of Hertz are IBM and Lyft. 19 billion USD of the company's assets are comprised of cars, which number amounts to about 400,000. The creditors realize that the only way for the company to pay off the debt is to sell the cars, but such supply will ruin the market prices, so the creditors will fail to get their money fully.
Both the creditors and the company's management realize it. As a result, during the bankruptcy, the company will decrease its car park gradually, paying off the debts, until they reach the level that will let them make money. The bankruptcy procedure protects the company from its creditors for 2 months, letting it work.
Carl Icahn left the company, hence, he will not influence it as before. NYSE will most likely exclude the stocks from circulation, thus, we may soon expect the second IPO of Hertz. At that moment, you may invest in the company freely because it will not be starting from scratch. The business is on, working well, and the brand is known all over the world. The subsidiaries will bring in money, and the only thing that the company will need to become one of the largest enterprises again is time.
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