Avis shares hit the Street jumping gain is 32%

IPO is bolstered by Hertz's success

Rental industry

September 25, 1997|By BLOOMBERG NEWS

NEW YORK -- Avis Rent A Car Inc. shares rose 32 percent in their first day of trading, benefiting from the company's low initial price and the success of rival Hertz Corp.'s initial public offering.

Parent company HFS Inc. sold 19.5 million shares at $17 each in a $331.5 million IPO. The issue rose $5.50 to $22.50 in trading of 14.6 million shares, the fourth most active issue on U.S. markets.

Fueling the rise is the 52 percent increase in industry leader Hertz's stock since it went public in April. Also, shares in the No. 2 rental company are trading at about 15 times estimated 1997 earnings, while Hertz shares garner a multiple of about 21 times earnings.

"People looked at the valuation and it looked very attractive," said Ryan Jacob, director of research at IPO Value Monitor.

Avis shares got off to a strong start because of investor demand for IPOs amid a rising stock market, said David Menlow, president of IPO Financial Network.

"Those people that feel that they missed the Hertz offering, this is their second chance," he said.

HFS sold the shares in Garden City, N.Y.-based Avis at the top of the expected price range of $15 to $17.

HFS, which owns and franchises some of the best-known names in the United States, including Ramada Inn and Coldwell Banker, is keeping about 30 percent of Avis' shares. HFS bought the rental-car company in October for $793 million in stock and cash.

HFS also is keeping control of Avis' valuable reservation system and the rental-car company's name. Ford Motor Co. sold all of Hertz, including the rights to its name, in its April IPO.

Avis must pay a royalty to use the Avis name, essentially making the newly public company the largest Avis franchisee. Avis will pay HFS a base royalty of 3 percent of revenue, plus a supplemental royalty of at least 1 percent.

"It's going to mean that they have lower margins than other rental-car companies, and if the economy does turn down, it could really squeeze their margins," said Ken Fleming, an analyst at Renaissance Capital Corp. in Greenwich, Conn.

HFS also is leaving Avis with all of its $2.98 billion in debt, which equals about 89 percent of Avis' total capitalization if adjusted for the IPO.

The debt, analysts said, is one motivation for HFS to take Avis public.

If Avis were an HFS unit a year after the purchase, HFS would have to consolidate the debt on its own balance sheet, according to Securities and Exchange Commission rules.

"When you have a motivated seller, they tend to price the deal a little cheaper just to ensure the completion," said Jacob. "Avis is less concerned about the price they get than making sure this deal gets completed."

Pub Date: 9/25/97

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