A bidding war for the bankrupt car rental group Hertz will reach its end game when rival private equity bidders square off in an auction to be conducted in a federal bankruptcy court on Monday.
A consortium led by Centerbridge Partners indicated that it would counterbid against a recent proposal submitted by another group led by Knighthead Capital that set Hertz’s enterprise value at $6.2bn.
That figure would allow existing Hertz shareholders to receive a surprisingly generous recovery valued in excess of $2 per share. The battle for the car rental company comes as the travel and leisure industries rapidly recover as vaccination rates soar and the US economy picks up steam.
The punches traded between the two bidding groups started in March when Hertz accepted a bid from Knighthead and its partners Certares Opportunities that valued the company at just $4.8bn. That bid was then topped in April by the Centerbridge group, which includes Warburg Pincus and Dundon Capital Partners.
On Wednesday, the Hertz board determined that the offer from Knighthead received last week constituted a “superior proposal”. Bidding procedures established by the bankruptcy court in Delaware have allowed Centerbridge to trigger the Monday auction.
Early bids by the two groups contemplated junior bondholders receiving equity in the new company while existing shareholders would be eliminated.
A group of hedge funds that accumulated Hertz shares argued that the company’s valuation was large enough to support at least a modest recovery for current shareholders. This group has since joined forces with Knighthead/Certares along with Apollo Global Management to lead a package of $7bn in fresh debt and equity capital to reorganise Hertz.
Their proposal offers a 50 cents in cash recovery to current Hertz equity holders and allows them to buy equity in new Hertz, either through a rights offering or through warrants. The group has pegged the value of this package at roughly $2.25 per share, according to one person directly familiar with the matter.
Hertz shares rallied last summer to more than five dollars on the strength of retail traders using the Robinhood app. Experts, however, scoffed as it appeared that since junior creditors would receive less than 100 cents on the dollar in the restructuring, the even lower-ranked shareholders would be entitled to nothing.
The Knighthead plan raises enough cash to pay off all creditors in full as well as make the cash payment to shareholders. Hertz’s shares have rallied to $3.48 from a low this year of 66 cents, implying a current market capitalisation exceeding $500m.
The bankruptcy court must approve the winning bidder, which will be followed by a vote on the plan by Hertz claimants. The company is racing to lock in a deal and exit the Chapter 11 process by the beginning of July, the start of the company’s busiest season.
The favourable conditions in the capital markets have enabled the fevered fight for Hertz.
“I can’t recall a better financing market,” William Derrough, Hertz’s investment banker at Moelis & Co, said in court testimony in April.