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Avis Budget Group Drives Away With Zipcar

By Chad Fraser on January 3, 2013

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Avis Budget Group (NasdaqGS: CAR), America’s third-biggest car-rental service by revenue, made a big move into the auto-sharing market yesterday, snapping up Zipcar (NasdaqGS: ZIP) in a $500-million deal. Zipcar shareholders must still approve the sale, but Avis Budget expects it to close in the spring.

The purchase price works out to $12.25 per Zipcar share, a 49% premium over the stock’s closing price on December 31. Zipcar has since jumped to $12.18, or just below Avis Budget’s offer. This shows that investors don’t expect a higher bid, either from Avis Budget or another buyer.

Avis Budget Can Easily Afford Zipcar

Avis Budget said it plans to finance the purchase with debt and cash on hand. As of September 30, it held cash and cash equivalents of $554 million. The company expects Zipcar to begin adding to its earnings in 2014. It also feels the deal will save it $50 million to $70 million a year.

The move comes after Avis Budget dropped out of the race to buy Dollar Thrifty Automotive Group, the fourth-biggest car-rental company in the U.S., last year. Rental car market leader Hertz Global Holdings (NYSE: HTZ) subsequently acquired Dollar Thrifty for $2.3 billion. That purchase closed in November.

Avis Budget is Driving Into a Fast-Growing Market

Zipcar may be an even better fit for Avis Budget. Founded in 2000, Zipcar was one of the first companies to offer car sharing, or renting automobiles to drivers who don’t own cars themselves, at an hourly rate. The business mainly targets urban areas, where car ownership can be expensive and inconvenient due to higher congestion and a lack of parking.

The company’s members, or “Zipsters,” pay an annual membership fee plus a per-hour or per-day rate. These rentals are fully automated and can be booked by phone, online or through mobile devices. Once the reservation is set up, clients simply go to a local Zipcar lot and access their car using their membership card (called a Zipcard). To further simplify things, Zipcar’s rates include gas and insurance.

Zipcar has set up lots for its fleet of 9,000 cars in central locations, including 300 near college campuses. The company now operates in 20 cities in Canada, the U.S. and Europe, and aims to add two to three new markets a year.

Membership continues to grow strongly, from 81,000 in 2006 to 673,000 in 2011. That figure kept rising in 2012, and stood at 767,000 on September 30. The U.S. car sharing market is currently worth about $400 million, and is expected to grow into a $10-billion industry in the coming years, according to Avis CEO Ronald Nelson.

Here are four other ways that Avis Budget should benefit from the deal:

  • Avis Budget becomes the instant market leader: Zipcar remains the strongest brand in the car sharing business. It’s also the dominant player, with 75% of the market. That’s a big advantage in a business like car sharing, which has relatively low barriers to entry.
  • Avis Budget and Zipcar nicely complement each another: Avis Budget’s car rental business, which gets a large portion of its sales from business travelers, tends to peak during the week, while Zipcar’s services are in high demand on weekends and holidays. By combining, Avis and Zipcar will be able to pool their surplus cars to ease shortages during peak times. Avis’s huge rental network will also make it easier for Zipcar to expand into new markets.
  • Zipcar is (finally) profitable: The company’s revenue has risen steadily in recent years. In the third quarter, it jumped 15% from a year earlier, to $78.2 million. For all of 2012, Zipcar is forecasting revenue of $275 million to $279 million, up from $241.6 million in 2011 and $186.1 million in 2010.

    Even so, Zipcar hasn’t managed to consistently turn a profit, but that looks like it’s about to change. In the latest earnings release, CEO Scott Griffith said the company remains on track to make 2012 its first full year of profitability. Zipcar expects to make between $1 million and $4 million on the year. That’s an increase over its August estimate of break-even to $1 million in profits.
  • Zipcar will improve Avis Budget’s customer service: Zipcar’s entire business is based on convenience, and Avis Budget could tap into the company’s expertise and automated rental technology to improve the speed and efficiency of its Avis and Budget brands, which rely heavily on airport car rentals. That could help it attract more business travelers, who place a high priority on speedy service.

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