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Avis offer called a 'lemon'
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August 15, 2000: 4:45 p.m. ET
Hotel franchiser Cendant bids $750M for rental car firm; analysts dismiss offer
By Staff Writer Tom Johnson
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NEW YORK (CNNfn) - Hoping to drive off with one of the nation's top car rental companies, Cendant Corp. offered Tuesday to acquire the remaining shares of Avis Group Holdings Inc. it does not already own for approximately $750 million.
In a non-binding proposal sent to Avis' board Tuesday morning, Cendant, the world's largest hotel franchiser, offered to purchase 25.6 million Avis shares, or roughly 82 percent of its outstanding shares, for $29 each in cash. That represents a 14 percent premium over Avis' closing price of 25-1/2 Monday.
Avis (AVI: Research, Estimates) shares soared on the news, climbing 5 to close at 30-1/2. Avis spokesman Greg Faulhaber said the company would convene its board "as quickly as possible" to consider the offer, possibly within the next 24 hours.
Cendant (CD: Research, Estimates), which owns the brand names for such diverse franchises as Days Inn and Ramada hotels to Century 21 and Coldwell Banker real estate agencies, already owns the Avis franchise system and a roughly 18 percent stake in Avis Group, its largest franchisee.
 Analysts immediately dismissed the offer as too low, and wondered why Cendant might be pursuing the company it spun off in 1997 and later sold its fleet management business to for $1.8 billion.
"The offer is too low and I'm not sure how sincere it is," said Dean Gianoukos, an analyst with J.P. Morgan. "[Cendant Chairman and Chief Executive] Henry Silverman doesn't like asset-intensive businesses, so why's he trying to buy one?"
Indeed, in recent years, Cendant has made a concerted effort to sell off all but its valuable brand names at it looked to clean up its balance sheet in the wake of uncovered accounting irregularities that dated back to 1997.
Avis operates a 220,000-car fleet with more than 720 locations worldwide, but must pay Cendant a steep royalty to use the Avis name.
The Garden City, N.Y. company also is operating in a sector that has been largely overlooked by investors in recent months. Despite strong cash flow and consistent earnings growth, Avis' stock only recently rebounded to levels it reached last December and still has been trading at only about eight times its forward earnings.
"It's a strange offer, but I think sees good value in Avis," said Robert Napoli, an analyst with ABN Amro. "These stocks as a group have come down and I think this offer will shed some light on a largely overlooked industry.
"But to buy this company at this price ($29 per share) is just outrageous," Napoli added, noting that he holds a $52 target range on the company's stock.
"Clearly, it's a recognition that the car rental business is undervalued," said David Riedel, an analyst with Salomon Smith Barney. "It's criminal that stocks would trade at these levels."
Earnings acceleration
One factor that may work against Avis in merger negotiations is the lack of a counter-bid, analysts said. The industry has seen little consolidation in recent years and with a tough pricing environment expected into next year, analysts said few companies were likely eyeing a possible foothold.
Still, that didn't stop investors from pushing Avis' rivals higher. Hertz Corp. (HRZ: Research, Estimates) shares jumped 2-1/16 to close at 33-7/8 while Dollar Thrifty Auto Group (DTG: Research, Estimates) gained 13/16 to 22-1/4.
Avis has spent much of the year cleaning up its balance sheet. Earlier this month, it closed a deal with BNP Paribas, whereby France's largest publicly traded bank agreed to invest $800 million in a new joint venture with Avis, creating a European leader of auto fleet management and leasing services for corporate customers.
The transaction allowed Avis to retire about $1 billion in term debt and launch a $100 million stock buyback program. Combined with the company's strong cash flow and expected earnings growth in excess of 20 percent the next two years, analysts said the company makes an attractive acquisition target, although some doubt Cendant could wring many synergies from the deal.
"It's unlikely that Cendant will pay too much for it," said Henry Diamond, an analyst with CS First Boston. "If they were to buy, I think they would want to buy it for a cheap price since it doesn't fit with their main strategy of buying brands instead of assets."
Cendant shares closed down 3/8 to 12-15/16 Tuesday on the news. 
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