ZipCar Avis Acquisition Valuation

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Corporate Finance @ Boston University Graduate School of Management. …

Corporate Finance @ Boston University Graduate School of Management.

Matthew Churinske
Felipe Flores
Michael Hallstrom
Cate Macgregor
Kobi Magnezi

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  • 1. AVIS-ZipCar Acquisition Valuation Matthew Churinske Felipe Flores Michael Hallstrom Cate Macgregor Kobi Magnezi December 11, 2013
  • 2. Agenda • • • • Discounted Cash Flow Comparable Company Multiples Comparable Acquisition Multiples Possible post-acquisition synergies December 11, 2013
  • 3. Introduction 49% premium December 31, 2012 ZipCar closing Price $8.24 March 2013, Zipcar was acquired by Avis Budget Group Inc. for $491 million January 2, 2013 First deal announcement December 11, 2013
  • 4. Industry Overview • • • • • Revenue has grown at an annualized rate of 1.2% Revenues are forecasted to grow at an annualized rate of 2.8% until 2018 Industry net profits are expected to reach $3.9B in 2013. Average profit: 11.2% of revenues. 6% The concentration in the market has 19% increased. leisure car rental 41% business car rental Car sharing has car leasing specifically grown car sharing in popularity over the 34% past five years. December 11, 2013
  • 5. ZipCar • Founded in 2000 • Operates in 20 major metropolitan areas and on more than 300 college campuses worldwide. • More than 750,000 members. • Proprietary technology drives Zipcar’s leadership and innovation in the car sharing space. December 11, 2013
  • 6. ZipCar: Revenue and Costs Revenue Costs • Vehicle usage and membership fees • application and damage waiver fees • Licenses its proprietary technology • 28% Growth between 2008-2012 • 34% Growth in members between 2011-2012 • Net losses in each year from its founding through 2011 • 2012: First net profit • Main costs: (1) Fleet operations (2) member services and fulfillment (3) R&D (4) SG&A December 11, 2013
  • 7. Cash Flows and Credit Risk Analysis • The majority of cash derived from • Nearly all customers pay in credit. • Capital expenditures as a % of annual revenue • 39% in 2012 • 25% in 2011 • Although the positive operating cash flows, free cash flow was negative due 2012 2011 2010 Times Interest Earned 1.39 * * OCF to Total Debt 0.65 0.50 0.14 1.04 0.62 0.21 Current Ratio 1.38 1.90 0.92 Quick Ratio 1.08 1.65 0.75 Total Liabilities to Equity 0.68 0.55 Total Liabilities to Assets operating activities 0.40 0.36 Total Debt to Equity 0.44 0.32 Coverage Analysis OCF/Current Liabilities (OCF Ratio) Liquidity Analysis Solvency Analysis ** 0.55 ** to P&I payments for an aggregate debt of $109.1M December 11, 2013
  • 8. Comparable Companies Valuation December 11, 2013
  • 9. Comparable companies Selection process: • Same operations: renting vehicles to businesses and consumers for personal or commercial use. • Managing a large fleet • reasonable comparable on the basis of their financials December 11, 2013
  • 10. Operation comparison using Management Efficiency ratios United Amerco Hertz Management Effectiveness Avis Rental (U-Haul) Ryder ZipCar HTZ CAR URI UHAL R Zip Asset Utilization (TTM) 0.445 0.461 0.4358 0.5062 0.754 0.73 Days Sales Outstanding (Annual) 70.87 26.29 55.72 4.15 41.92 9.2 5.15 13.88 6.55 87.91 8.71 39.65 Return on Assets (TTM) 1.34% -0.01% 2.58% 6.03% 2.68% 0.99% Operating Margin (TTM) - Dec 2012 1.53% 0.49% 14.36% 19.82% 3.68% 2.19% Receivables Turnover (Annual) December 11, 2013
  • 11. Financial comparison Company Performance Company (Stock Symbol) Hertz (HTZ) U-Haul aka AMERCO(UHAL) United Rentals (URI) Ryder System, Inc. ( R) Avis-Budget Group (CAR) Zipcar (ZIP) Revenue $9,020,807 $2,558,587 $4,117,000 $6,256,967 $7,357,000 $278,868 Net Income $243,079 $264,708 $75,000 $209,979 $290,000 $14,187 Net EBIT/Net EBITDA/Net Income / Income Income Revenue EBIT EBITDA EBITDA/EBIT 2.69% $1,095,535 4.51 $3,243,693 13.34 2.96 10.35% $499,183 1.89 $754,555 2.85 1.51 1.82% $591,000 7.88 $1,488,000 19.84 2.52 3.36% $443,674 2.11 $1,432,560 6.82 3.23 3.94% $643,000 2.22 $2,239,000 7.72 3.48 5.09% $6,098 2.22 $50,797 8.33 3.58 December 11, 2013
  • 12. Composition of the Model December 11, 2013
  • 13. The composition process Extract information from the respective 10Ks • • • • Common shares outstanding The value of interest-bearing debt Cash and cash equivalents Revenue, EBITDA, EBIT Calculate the Market Value of Equity and EV Calculate three performance multiples • Revenue/EV • EBITDA/EV • EBIT/EV • Revenue Multiple: 1.79 (individual company ranged 1.0 – 2.8) • EBITDA Multiple: 6.08 (company ranged 4.4 – 7.7) • EBIT Multiple: 18.38 (company ranged 9.2 – 19.9). December 11, 2013
  • 14. Model based on the financial results of the five companies Al l Fi gures i n 000's Calculating Enterprise Value Company (Stock Symbol) ***Mkt value of equity Hertz (HTZ) **U-Haul aka AMERCO(UHAL) United Rentals (URI) Ryder System, Inc. ( R) Avis-Budget Group (CAR) $6,857,575 $3,387,289 $4,232,632 $2,564,989 $2,715,904 Int-bearing debt $15,448,624 $1,661,845 $7,364,000 $3,820,796 $9,711,000 Cash & cash equiv. $533,255 $463,744 $106,000 $66,392 $606,000 Performance Metrics Enterprise value $21,772,944 $4,585,390 $11,490,632 $6,319,393 $11,820,904 Revenue $9,020,807 $2,558,587 $4,117,000 $6,256,967 $7,357,000 EBITDA Multiples based on BEV EBIT $3,243,693 $1,095,535 $754,555 $499,183 $1,488,000 $591,000 $1,441,640 $443,674 $2,239,000 $643,000 EV/R EBITDA / EV EBIT / EV 2.4 1.8 2.8 1.0 1.6 6.7 6.1 7.7 4.4 5.3 19.9 9.2 19.4 14.2 18.4 1.92 1.79 6.03 6.08 16.23 18.38 Figures publicly reported for the last twelve months from December 31, 2012 **UHAL figures were reported for the last twelve months from March 28, 2013 ***Calculated as common shares outstanding X closing share price, December 31, 2012 (except for UHAL which was March 28, 2013)) Mean Median $3,951,678 $3,387,289 $7,601,253 $7,364,000 $355,078 $463,744 $11,197,853 $11,490,632 $5,862,072 $6,256,967 $1,833,378 $1,488,000 $654,478 $591,000 Valuations of ZipCar based on Comparable Companies Calculated ZIPCAR - Value 1 ZIPCAR - Value 2 ZIPCAR - Value 3 Calculated $435,289 $244,961 $48,196 $109,140 $109,140 $109,140 $45,255 $45,255 $45,255 $499,174 $308,846 $112,081 Multiple used $278,868 1.79 $50,797 6.08 $6,098 18.38 Estimated share prices based on calculated equity values Value 1 - price per share: Value 2 - price per share: $10.85 $6.11 Value 3 - price per share: $1.20 8.24 Actua l s ha re pri ce a t cl os e, 12/31: Enterprise value of ZipCar based on comparable companies: $499.2 Million ` December 11, 2013
  • 15. Value of Interest - Bearing Debt Calculation Al l Fi gures i n 000's Interest-Bearing Debt: Components Company (Stock Symbol) LT Debt ST Debt & Current Portion of Long Other-1 Other-1 Descrip United Rentals (URI) $6,679,000 $3,452,821 $367,975 Avis-Budget Group (CAR) $2,848,000 $57,000 Other-2 Descrip $15,448,624 Debt Notes , l oa ns a nd $1,661,845 l ea s es pa ya bl e Subordi na ted convertibl e $630,000 $55,000 debentures Ryder System, Inc. ( R) Other-2 Hertz (HTZ) U-Haul aka AMERCO(UHAL) Zipcar (ZIP) Value of InterestBearing Debt $15,448,624 $1,661,845 $7,364,000 $3,820,796 Debt under vehi cl e $1,603,000 progra ms Current portion of ca pi tal l ea s e obl i ga tions a nd $14,424 other debt Debt from thei r $5,203,000 fundi ng orga ni za tion Ca pi tal l ea s e obl i ga tions a nd other debt, net of $94,716 current portion $9,711,000 $109,140 December 11, 2013
  • 16. Market Value of Equity Calculation Company (Stock Symbol) Hertz (HTZ) U-Haul aka AMERCO(UHAL) United Rentals (URI) Ryder System, Inc. ( R) Avis-Budget Group (CAR) Common Shares Market Value of Market Value of Equity Outstanding, Equity (thousands) 12/31/12**** 16.27 421,485,862 $6,857,574,975 $6,857,575 173.54 19,518,779 $3,387,288,908 $3,387,289 45.52 92,984,016 $4,232,632,408 $4,232,632 49.93 51,371,696 $2,564,988,781 $2,564,989 19.82 137,028,464 $2,715,904,156 $2,715,904 Share Price: Mkt Close, 12/31/12*** ***UHAL data is as of 3/28/13 ****UHAUL shares outstanding measured as "weighted average common shares outstanding: basic and diluted" December 11, 2013
  • 17. Bottom-up calculation All figures in 000's EBIT: Components Company (Stock Symbol) Hertz (HTZ) U-Haul aka AMERCO(UHAL) United Rentals (URI) Ryder System, Inc. ( R) Avis-Budget Group (CAR) Zipcar (ZIP) Net Income Interest Expense $243,079 $649,892 $264,708 $90,696 $75,000 $209,979 $290,000 $14,187 $512,000 $140,557 $268,000 $4,385 Tax Expense (benefit) $207,466 $143,779 Other-1 Description-1 -$4,902 Interest income Description-2 Interest expense subordinated convertible $4,000 debentures, net $13,000 $102,218 Early extinguishment of debt $10,000 $75,000 -$367 Interest income -$10,397 Tax benefit Bottom-Up EBIT $1,095,535 $499,183 Top-Down EBIT $1,095,535 $499,183 $604,000 $452,754 Other-2 $591,000 $443,674 $643,000 $7,808 $643,000 $6,098 All figures in 000's EBITDA: Components Company (Stock Symbol) Hertz (HTZ) EBIT $1,095,535 U-Haul aka AMERCO(UHAL) $443,674 $643,000 $172,582 Amortization Expense $84,096 $591,000 Ryder System, Inc. ( R) Avis-Budget Group (CAR) $2,068,378 Non VehicleRelated Depreciation $499,183 United Rentals (URI) Vehicle-Related Depreciation Zipcar (ZIP) $6,098 $49,209 $1,471,000 Other-1 Description-1 Amortization and write-off of deferred $54,131 financing costs Depreciation, net of (gains) losses on $237,996 disposals Depreciation & $897,000 amortization Depreciation $939,677 expense Other-2 Description-2 Amortization and write-off of debt $28,899 discount Amortization of deferred policy $17,376 acquisition costs Amortization of deferred financing costs and original $23,000 issue discounts Top-Down EBITDA Amortization & accretion of marketable $106 securities $3,503,621 $3,243,693 $754,555 $754,555 $1,511,000 $1,488,000 $1,432,560 $2,239,000 $125,000 Depreciation & $41,253 amortization Bottom-Up EBITDA $1,432,560 $2,239,000 $47,457 $50,797 December 11, 2013
  • 18. Results Breakdown Based on the Revenue multiple: • Zipcar EV = $499.2M • Zipcar Mkt. Value of Equity = $435.3M, or $10.85 /share • Based on the EBITDA multiple: • ZipCar EV = $308.8M • ZipCar Mkt. Value of Equity = $245.0M, or $6.11/share Based on the revenue multiples approach, which was deemed most appropriate for appraising the Based on the EBIT multiple: • ZipCar EV = $112.1M • ZipCar Mkt. Value of Equity = $48.2M, or $1.20 /share business, Zipcar is valued at $499.2 M. December 11, 2013
  • 19. Discounted Cash Flow Valuation December 11, 2013
  • 20. Composition of the Model: Projections Zipcar Inc STATEMENTS OF OPERATIONS Historical (in thousands) 2007 2008 2012 Projections 2009 2010 2011 $ 131,182 $186,101 $241,649 $278,868 $ 316,515 $ 357,662 $ 402,370 $448,642 $493,507 $122,634 $159,185 $173,613 $ 188,370 $ 204,382 $ 221,754 $240,603 $261,054 $ 21,225 $ 21,862 $ 22,518 $ 23,194 2013 13.5% Revenues $57,818 $ 105,969 Fleet operations Member services and fulfillment $50,033 $ 84,199 $ 93,367 $ 4,379 $ 7,580 $ 10,414 $ 15,114 $ 19,460 $ 20,007 $ 20,607 2014 2015 2016 Revenue growth assumptions: 13.0% 12.5% 11.5% 5,373 $ 5,856 $ 6,383 Research and development $ 904 $ 1,549 $ 2,314 $ 3,170 $ 3,948 $ 4,522 $ 4,929 $ Selling, general and $16,204 $ 25,324 $ 29,973 $ 49,172 $ 57,117 $ 71,558 $ 77,998 $ 85,018 $ 92,670 $101,010 administrative Amortization of acquired $ 219 $ 1,226 $ 990 $ 3,414 $ 3,892 $ 3,070 $ 3,131 $ 3,194 $ 3,258 $ 3,323 intangible assets Total Operating Expenses $71,739 $ 119,878 $ 137,058 $193,504 $243,602 $272,770 $ 295,036 $ 319,192 $ 345,400 $373,837 Operating Income -$13,921 -$13,909 -$5,876 -$7,403 -$1,953 Interest Expense Other, net Earnings before Tax Tax Benefit or Expense Net Income -$2,070 $1,547 -$14,444 $0 -$14,444 -$1,603 $997 -$14,515 $0 -$14,515 -$2,457 $3,750 -$4,583 $84 -$4,667 -$8,185 $1,778 -$13,810 $311 -$14,121 -$8,634 $3,169 -$7,418 -$270 -$7,148 Tax on Operating Profit NOPAT $6,098 $21,479 $38,470 $56,970 $74,805 2017 10.0% $ 6,958 $110,101 $ 3,390 $404,696 $88,811 -$4,385 $ (4,911) $ (5,501) $ (6,161) $ (6,900) $ (7,728) $1,537 $ 1,568 $ 1,599 $ 1,631 $ 1,664 $ 1,697 $3,250 $18,136 $34,569 $52,440 $69,569 $82,780 -$10,937 (6,348) (12,099) (18,354) (24,349) (28,973) $14,187 $11,788 $22,470 $34,086 $45,220 $53,807 7,518 $13,962 13,465 25,006 19,940 37,031 26,182 48,623 31,084 57,727 December 11, 2013
  • 21. WACC and Beta WACC CALCULATION Capital Structure Equity Debt Capital Target E/V Target D/V Cost of Equity Risk free rate Beta Market risk premium Total $330,602 $109,140 $439,742 60% 40% A beta of 0.88 was calculated using the performance of the S&P 500 as the market indicator from the day Zipcar went public until December 31, 2012. ZIP % change 20.00% 10.00% 0.00% 1.78% 0.88 5.50% 6.62% -10.00% -20.00% -30.00% S&P % change Cost of Debt 4.87% -40.00% 6.000% 4.000% Tax Rate WACC 35% 5.24% 2.000% 0.000% -2.000% -4.000% -6.000% -8.000% December 11, 2013
  • 22. Discounted Cash Flow: Results The discounted cash flows for 2013–2017 resulted in an NPV of $16,161. The PV of the terminal value was found to be $534,022. After adding back marketable securities, the total value of Zipcar was determined to be $572,422; subtracting the value of debt from the firm value gave a value of equity of $463,282; and finally, dividing by the outstanding shares provided us with an intrinsic share price of $11.55. December 11, 2013
  • 23. Comparable M&A Valuation December 11, 2013
  • 24. Comparable transactions Selected Comparable Mergers and Acquisitions (Values in millions USD) Transaction Close Date Target Acquirer 3/15/2013 ZipCar Avis Budget Group Value $510 United Rentals Hertz $2,586 $2,592 Selected Comparable Transactions 5/1/2012 RSC Holdings INC 11/28/2012 Dollar Thrifty 1 Target Target Revenue $279 Target EBITDA $47 Market Cap $330 $1,440 $1,557 $508 $692 $1,180 $2,221 2 Target BEV3 Not Selected Comparable Transactions 10/3/2011 Avis Budget EMEA Avis Budget Car Rental $1,010 $2,186 $338 9/1/2011 Donlen Corp Hertz $947 $350 10/31/2012 Apex Car Rentals Avis $89 6/8/2011 Hill Hire Ryder $253 $187 7/15/2013 Payless Car Rental System Avis Budget Car Rental $50 1. Transaction Value: The total consideration given to the seller including cash, notes, securities, and milestone payments 2. Target Market Cap: Price per share for target firm's stock on day the deal was announced x the # common shares outstanding 3. Target BEV: Target Market Cap + (short term debt + long term debt) - cash & marketable securities $403 $3,520 $3,170 - Using comparable M&A transactions, Zipcar’s EV was calculated to be $448.9M. December 11, 2013
  • 25. Comparable transactions The following provides an overview of Zipcar’s EV calculation based on the top two comparable M&A companies: December 11, 2013
  • 26. Using All Comparable M&As to Check Zipcar’s EV Valuation December 11, 2013
  • 27. Analysis of Synergies December 11, 2013
  • 28. Synergies Benefits • Avis Budget acquired Zipcar to become the leading company and an innovator in the rapidly growing car sharing industry. These cost synergies • Potential benefits are • • • • • • are estimated to save the company $25M over the short-run. Additional estimated saving of $20+M Reduce fleet acquisition Reduce vehicle-operating Reduce vehicle financing Reduce Insurance Leverage the larger fleet size with suppliers More efficient fleet utilization Additional estimated saving of $20+M December 11, 2013
  • 29. Summary December 11, 2013
  • 30. Low and high bids Valuation Method Estimate of ZipCar’s value Comparable Companies $499.2M DCF $463.3M Comparable Acquisitions $448.9M Each of these models was given equal weight and the averaged value was accepted as the best estimate of the true value of the company: $470.5M $470.5M 75% synergies premium $505M December 11, 2013
  • 31. Thank you! December 11, 2013