Bidding for Hertz: Leveraged Buyout Overview In late summer 2005, Greg Ledford, managing director and head of automotive and transportation buyouts at the Carlyle Group, found himself examining his BlackBerry atop the Great Wall of China. Though he had planned to be sightseeing with his daughter, his immediate focus was to finalize the terms of the second-largest leveraged buyout in history. The target in question was Hertz, a subsidiary of the Ford Motor Company, which was up for sale. Ledford needed to decide the price he and his co-investors would offer for Hertz as well as assess the potential returns and risks of the deal. Already months of work, many dollars of due diligence, and arrangement of tentative financing had gone into the bid. Complicating matters, he knew he faced tough competition from a rival buyout group, no doubt engaged in a similar process. The race to win Hertz had been set in motion several months earlier, when William Clay Ford Jr., the chairman and CEO of Ford, announced plans to explore "strategic alternatives for Hertz in April 2005. That announcement was followed in June 2005 by the filing of an S-1 registration statement setting up a "dual track process that would result in a Hertz IPO should other sale prospects fail. Ledford, who spoke to senior Ford managers on a regular basis, had gleaned that there was interest on Ford's part for an outright sale of Hertz. He believed a private sale that was competitive with an IPO would be viewed favorably by Ford due to its greater up-front cash proceeds and certainty of execution. When no strategic buyer surfaced, Carlyle, Clayton, Dubilier & Rice (CD&R), and Merrill Lynch Global Private Equity (collectively "Bidding Group") joined forces to bid on Hertz. It faced competition from another buyout consortium that included Texas Pacific Group, Blackstone, Thomas H. Lee Partners LP, and Bain Capital LLC. Hertz Ownership History Hertz's ownership history was characterized by a series of sales, public offerings, and leveraged buyouts (Exhibit 1). The company was first established in 1918 by 22-year-old Walter L. Jacobs as a car rental operation with a modest inventory of 12 Model T Fords that Jacobs personally had repaired and repainted. The venture was immediately successful, leading Jacobs to expand and generate annual revenues of approximately $1 million within five years. At the $1 million mark, in 1923, Jacobs sold his company to John Hertz, president of Yellow Cab and Yellow Truck and Coach Manufacturing Company, who gave his name to the company, creating "Hertz Drive-Ur-Self System" and a brand name that had endured ever since. John Hertz sold his investment three years later to General Motors (GM). In 1953, GM in turn sold the Hertz properties to the Omnibus Corporation, which simplified the company's name to "The Hertz Corporation" in connection with a public stock offering on the New York Stock Exchange (NYSE). In late 1987, together with Hertz management, Ford Motor Company participated in a management buyout of the company. Hertz later became an independent, wholly owned subsidiary of Ford in 1994. Less than three years later, Ford issued a minority stake of shares through a public offering on the NYSE on April 25, 1997. In early 2001, Ford reacquired the outstanding shares of Hertz and the company again became a wholly owned subsidiary of the Ford Motor Company. Partially due to 9/11, off-airport rentals, which consisted primarily of insurance replacement (rentals provided by insurance companies while the policyowner's automobile was out of service), local business travel, and leisure travel, had recently grown at a faster pace than had airport rentals. The Equipment Rental Market As of August 2005, the size of the North American equipment rental market in revenues was believed to be $25 billion, while that of France and Spain were approximately $4 billion and $2 billion, respectively. But because HERC only offered certain types of equipment, Hertz's applicable market was somewhat smaller. The equipment rental market was more variable than the car rental market and depended mostly on industrial productivity, particularly commercial and residential construction. Over the past 15 years, the best estimates of growth suggested the market had grown at an annual rate of approximately 9.7%. During this time, there was a trend toward companies in need of equipment renting rather than owning it, which was expected to continue. The market had experienced rapid growth in the 1990s but had slowed considerably between 2000 and 2003 with the decline in the economy. The equipment rental market had recently started to rebound from the 2000-03 levels, a rebound which was expected to continue. Unlike the car rental market, the U.S. equipment rental industry was highly fragmented with few national competitors. Other major national scale operators like Hertz included United Rentals, Inc., and RSC Equipment Rentals, a division of the Atlas Copco Group. The equipment rental business was highly competitive, and rental prices had started declining in 2001 and did not improve in North America until 2004. Prices in France and Spain had yet to stop declining." Instead of a concentrated source of revenues (U.S. airports), customers of the equipment rental industry were widely scattered throughout the country. This complicated the distribution of equipment and reduced the opportunity to achieve scale in operations, encouraging local players to compete with large businesses. Nonetheless, Hertz was a top player in the industry, ranking third based on 2005 revenues. Hertz's diverse customer base also helped to alleviate some of the risks of cyclicality and seasonality present in the industry. Tough Times at Ford Ford's acquisition of Hertz in January 2001 reflected the strategy of its then CEO and president, Jacques A. Nasser. Nasser had been promoted from president of Ford's worldwide automotive operations to become CEO in December 1998. At the same time, Bill Ford Jr., a great-grandson of Henry Ford, assumed the role of company chairman. Nasser's strategy was to turn Ford into something, anything, other than a traditional car company. He attempted to shrink Ford's mainstream automotive divisions and remake it into a leading consumer company in automotive products and services. Known for his abrasive style, Nasser frenetically pursued his strategy, jetting around the world and working 20-hour days. He acquired Volvo, Land Rover Hertz, and spent billions pursuing noncore operations. During Nasser's three-year tenure, Ford's once- impressive $15 billion cash reserve dwindled to less than $1 billion by 2001.6 In November 2001, Bill Ford Jr. assumed the CEO role at Ford replacing Nasser. After the turbulent years of Nasser, Bill Ford's ascension to CEO was greeted enthusiastically. But Ford inherited a company that had lost $5.5 billion the previous year and whose future held great uncertainty. While Ford had a strong line of a In November 2001, Bill Ford Jr. assumed the CEO role at Ford replacing Nasser. After the turbulent years of Nasser, Bill Ford's ascension to CEO was greeted enthusiastically. But Ford inherited a company that had lost $5.5 billion the previous year and whose future held great uncertainty. While Ford had a strong line of trucks, its passenger car line was lagging. By mid-2002, Ford was losing $190 per vehicle because of its bloated cost structure and intense pricing pressure from competitors. Although Ford proposed several restructuring plans that would reduce costs and reenergize its passenger car line, his plans were not enough to stem the company's decline. By the time he announced the company's intentions to explore strategic options for Hertz in April 2005, Ford's stock price had fallen to less than $10 per share. The company continued to lose money, especially in its North American operations. Rumored to be facing a potential downgrade in its bond rating, Hertz looked to be a viable candidate for Ford to raise some much-needed cash to shore up its bond rating and attempt to return its car operations to profitability. Hertz as an LBO candidate Although Ford owned 100% of Hertz, Hertz had operated largely without oversight by or obligation to Ford. Members of the Bidding Group had individually evaluated Hertz and believed it to be an attractive leveraged buyout candidate. Operating Synergies Hertz's two business segments presented large opportunities for operational improvement. The key drivers of the rental car business included the number of fansactions, the length of each rental, revenue per rental day, and fleet utilization. Transaction volume, which was a good indicator of market demand, typically followed growth in the general economy and enplanements. Rental length was largely dependent on customer and end- product mix. Leisure and insurance renters generally rented cars for longer periods than business travelers. Another major driver of revenues was price, or revenue per rental day. Utilization of the fleet also played an important role in determining profitability and return on assets. Improvement in any of these drivers had the potential to yield substantial increases in revenue. With travel finally beginning to rebound after the events of 9/11, the near-term market trends appeared favorable, and management had projected transaction volume to grow 6.9% in 2005. With respect to price, the Hertz brand was exceptionally strong and recognized worldwide. Hertz had shown an ability to sustain a premium pricing strategy, which was in part due to its loyal customer base. Although Hertz was the price leader in the market, it could not impose higher rates if competitors chose not to follow. Hertz was one of the largest private sector purchasers of new cars in the world. In 2004, the company operated a peak fleet of 300,000 cars in the United States and approximately 169,000 in its international operations. Fleet usage was highly seasonalit peaked in the second and third quarters of the year and declined in the first and fourth quarters as leisure travel waned. Significant cost savings could arise from right sizing the fleet (purchasing and disposing of cars) to match seasonal demand. Historically, Hertz had purchased the majority of its cars from Ford, but in recent years, it had moved to decrease its reliance on Ford vehicles. In part, this was in response to U.S. auto manufacturers' decision to reduce fleet sales to bolster their own profitability. This had two effects on Hertz and its competitors. First, it increased vehicles costs and second, it An increase in increased the proportion of "at risk" vehicles potentially subject to declining residual values. 10 --- part, this was in response to U.S. auto manufacturers' decision to reduce fleet sales to bolster their own profitability. This had two effects on Hertz and its competitors. First, it increased vehicles costs and second, it increased the proportion of "at risk" vehicles potentially subject to declining residual values. An increase in 10 vehicle costs in 2006 was expected to increase Hertz's acquisition costs and hence fleet capital spending by proportionately more than the previous year, The Bidding Group compared Hertz with peer firms and with its own historical results to identify the following operational savings." 1. Current adjusted EBITDA margins were approximately 400 basis points (bps) below 2000 levels and were 100 to 200 bps below those of Avis. 2. From 2002 to 2005E nonfleet-related operating expenses had increased by 38% and had outpaced revenue growth by 6%. 3. Hertz's off-airport growth strategy had resulted in significant losses. The Bidding Group would look to rationalize this strategy. 4.U.S. RAC's nonfleet capital expenditures (CAPEX) as a percentage of sales were considerably higher than Avis's long-term CAPEX levels. 5. Europe RAC's SG&A as a percentage of sales and on a per-day basis were three times higher than those in the United States. 6. HERC's return on assets lagged that of competitors, reflecting an inefficient use of capital. In 2005, HERC's rental revenue on fleet assets was projected to be 70.5%. By comparison, the returns for RSC and United Rentals were expected to be 85% and 116%, respectively. All told, the Bidding Group believed that an amount between $400 million and $600 million in annual EBITDA savings (relative to 2005 levels) was attainable by 2009. These estimates of operational improvements were confirmed by external industry advisors who had been hired as part of due diligence. The Bidding Group had also carefully evaluated Hertz's management team. The current management team had considerable industry experience but, partially as a result of Ford's hands-off management style, they operated in an insular manner and not been pressured to excel. The existing compensation structure was based on market share, and new incentive plans were planned that would target cash flow and capital usage metrics. If removal of the current CEO, Craig Koch, proved necessary, an experienced manager, George Tamke, had been identified to step in. Tamke, who was currently a partner at CD&R, was formerly vice chair and co-CEO of Emerson Electric, and had successfully led CD&R's Kinko's transaction. Financial Synergies In addition to operational savings, the Bidding Group had identified several sources of financing value, most notably debt that could be backed by Hertz's fleet of rental cars (asset-backed securitized debt). By contrast, Ford bad opted to rely mainly on more expensive unsecured financing. Asset-backed securitized (ABS) debt was a form of financing commonly used by financial institutions to remove illiquid assets from their balance sheets (such as mortgages or credit card receivables) and raise cash from them. ABS financing required the creation of a special purpose vehicle (SPV) to facilitate its issuance. An SPV was set up to achieve legal isolation of the assets from the original holder of the assets or "originator." The originator conveyed the assets to the SPV (or trust), which transferred ownership of the assets from the ine originator conveyed the assets to the Srv (or trust), which transiered ownership of the assets from the originator to the trust. The SPV would then issue securities backed by the assets of the trust. The interest and principal on the securities were paid from the receipt of cash flows that arose from the trust assets. Because the debt issued by the trust was nonrecourse to the originator, an important benefit of ABS was that the credit rating on the debt was based on the trust assets rather than the originator's assets. The proceeds raised from the sale of asset-backed securities to investors were returned to the originator, thereby enabling illiquid assets of the originator to be turned into cash. Although ABS financings were commonplace, this form of financing had never been used in a buyout before Hertz In Hertz's case an SPV ("RAC Fleet") would be set up to retain legal ownership of the rental car fleet and its associated debt. Hertz would make payments in the amount of the fleet depreciation and interest to RAC Fleet, such that it effectively sold the fleet to the SPV and then leased it back (i.e, the depreciation and interest payments effectively represented the operating lease payments). Furthermore, as Hertz acquired (deposed of) cars, it had agreements to increase (decrease) the ABS debt. Investors who purchased ABS debt would be paid through the lease payments Hertz remitted to RAC Fleet. Through a combination of these payments and credit enhancement (including the purchase of insurance for the ABS assets), Hertz hoped to be able to raise $6.1 billion in secured debt at an AAA rating, which was considerably higher than Hertz's current rating of BBB- The ABS debt carried a low interest rate for LBO-type financing, estimated at about 4.5%.12 The Bidding Group believed it held a distinct advantage with respect to financing. Early in the process, it had entered into a financing arrangement with Lehman Brothers and Deutsche Bank to provide ABS debt financing for the transaction. Lehman Brothers and Deutsche Bank held a 90% market share in the ABS market for rental car financing. Not only was the ABS debt less expensive but it also provided a more flexible financing arrangement that allowed for the debt to increase and decrease with fleet size. Deal Structure Given the large deal size, the ABS debt was not the only source of financing needed to finance the buyout. Exhibit 5 shows the proposed financing for the transaction. Although $1,400 million of existing debt would roll over, for the most part, Carlyle and the consortium members planned to raise new debt to finance the deal. In total, the nonequity funding for the transaction was approximately $12.5 billion." In the summer of 2005, the debt and LBO market had recovered from the lows following the 2001 slowdown. Senior debt, which had fallen to 2.38* EBITDA in 2002, had since recovered to 3.24x EBITDA in 2004. Further relaxation of lending standards had occurred over the course of 2005 and senior debt multiples were expected to close above 4x EBITDA by year end 2005. Deal valuation had followed suit, purchase- price multiples, which had fallen to around 6x EBITDA in 2001, had expanded to more than 8 EBITDA in 2005. Exhibit 6 shows the recent history of debt and purchase price multiples. Valuation of Hertz The Bidding Group planned to set up both RAC and HERC as separate legal entities within a holding company named "Hertz Corporation" or "HertzCo" in part due to the decision to use ABS financing, and because later it might facilitate separate disposals of the properties. HertzCo consisted of the two business segments: RAC and HERC. RAC was made up of RAC Operating Company (OpCo), which held claim to the cash flows and nonfleet assets of the car rental company, and RAC Fleet, the subsidiary which housed the Pantolor float LED hala enim in the nach Arad matalinace Thin representation RAC could be valued by applying an appropriate multiple to RAC OpCo's operating flows and then adding the net book value of the fleet. Due to its relatively short life, the fleet had a fairly transparent market value, which was well approximated by its book value. Because of the ABS debt, the operating company's flows had to be adjusted to reflect the depreciation and interest payments made to RAC Fleet. In essence, the service obligations on the fleet had to be met before the providers of LBO financing were paid. RAC Adjusted EBITDA was therefore RAC Gross EBITDA less fleet depreciation and fleet interest. HERC could be valued by applying an appropriate multiple to HERC Gross EBITDA (Revenues less Direct Operating and SG&A Expenses).15 HERC did not utilize ABS debt because the market value of equipment rentals was less transparent (due to longer lives and diverse usages). Exhibits 8 and 9 contain a base-case pro forma income statement and balance sheet with projections for 2006-10. Given projected enplanements, car-rental growth was estimated to slow to 4.5% by 2009 and stabilize at that level. Though the equipment rental market had started to rebound from a cyclical slowdown, equipment rental growth at Hertz had been much more variable, and it was eventually expected to decline over time and to stabilize at 3% by 2010. The base-case estimates build in the low end of $400 million in operational savings over time and incorporate the segment revenue growth rates noted above. RAC fleet expenditures (and ABS debt) were expected to increase as a percentage of sales due to higher vehicle costs, leading to corresponding increases in RAC depreciation.' Exhibit 10 combines the operating cash flows of the two divisions and provides cash-flow projections for 2006-10. Although it was not possible to directly estimate a beta for Hertz, comparable company equity betas were around 1.5, which, when de-levered, yielded unlevered betas of approximately 0.60. But there was a wide range to these estimates. Interest rates as of August 2005 and market multiples are shown in Exhibit 11. The Decision Any bid put forth by the Bidding Group for Hertz would have to satisfy three critical tests. First, it would have to provide adequate returns to the sponsors' limited partners. Second, it would have to be higher than Ford could receive from an IPO, Third, the bid would have to best that of the rival bidding group. Time was drawing to a close, and Carlyle and its partners needed to finalize their bid. Ledford knew that his investment committee would not only be keenly interested in the possible returns they could expect from Hertz, but also in his views on the risks of the deal and bidding strategy. Although much work had been done, much more lay ahead. It was not turning out to be the vacation he planned. 16 Exhibiti Bidding for Hertz: Leveraged Buyout Hertz Ownership History EM H 1 M Source: Hertz Corporation Exhibit 2 Bidding for Hertz: Leveraged Buyout Hertz Historical Consolidated Income Statement (S millions) 2002 2003 2004 2005E RAC Revenue Direct Op Ex & SGRA Cross EBITDA Fleet Depreciation Fleet Interest Adjusted EBITDA $4,5427 26763 1.8664 1.2167 2709 3788 $48522 29139 1.908.3 1256.4 276 2 3757 $5.4901 3,3939 2.0962 1.2319 3102 5541 56,0617 38452 2206.5 1.3622 3801 1542 HERC Revenue Direct Op Ex& SGRA Gross EBITDA Fleet Depreciation Fleet Interest Adusted EBITDA 1.095.7 7222 373.5 2828 954 -47 1085 7179 3636 257.0 789 177 1.1859 749.6 4363 2314 743 130.6 1.358.0 805.1 5529 2280 366 2283 Total Adjusted EBITDA Non-Fleet Depreciation Operating Company Interest Expense 3741 1576 00 3934 156.0 0.0 687 1827 00 es 1847 00 Pretax Inc 2165 2374 SOT Exhibit 2 Bidding for Hertz: Leveraged Buyout Hertz Historical Consolidated Income Statement ($ millions) 2002 2003 2004 2005E RAC Revenue Direct Op Ex & SG&A Gross EBITDA Fleet Depreciation Fleet Interest Adjusted EBITDA $4,5427 2,6763 1.866.4 1,216.7 270.9 378.8 $4.8522 2.943.9 1.908.3 1.256.4 2762 375.7 $5.490.1 3,393.9 2,096.2 1.231.9 310.2 554.1 $6,0517 3,845,2 2 206.5 1,362.2 380.1 4642 1.095.7 7222 373.5 2828 95.4 1,0815 7179 3636 2670 78.9 17.7 1,1859 749.6 436.3 2314 74.3 130.6 1,358.0 805.1 5529 228.0 96.6 2283 po 4.7 HERC Revenue Direct Op Ex & SG&A Cross EBITDA Fleet Depreciation Fleet Interest Adjusted EBITDA Total Adjusted EBITDA Non-Fleet Depreciation Operating Company Interest Expense Pretax Income Book Taxes Minorky Interest 374.1 157.6 00 3934 1560 00 6847 1827 0.0 6925 184.7 0.0 216.5 779 0.0 237.4 85.5 0.0 5020 180.7 3.2 5078 1829 9.7 $138.6 $151.9 $321.3 $324.9 Net Income Reflect pre-LBO astumated set income for 2005 Data source: Consortium internal documentation Data source: Consortium internal documentation Exhibit 3 Bidding for Hertz: Leveraged Buyout Hertz Historical Consolidated Balance Sheet ($ millions) 2002 2003 2004 2005EM) Assets Cash and Equivalents Fleet Cash Enhancement Accounts Receivable Manufacturer Receivables Inventories Prepaid Expenses Other Assets Total Current Assets 6013 00 799.1 473.8 71.8 838 423 2.0721 1.110.1 00 13082 5119 73.4 903 456 3.1395 1.237.9 00 1.225.1 600.1 83.3 100.1 441 3.290.6 1.1029 00 1.0042 629.7 92.7 1131 36.5 29791 Fleet. Net PP&E Net Existing Goodwill & Intangibles New Goodwill & Intangibles Total Assets 74258 1.111.8 519.0 20 11.1287 7.7833 1.169.8 536.9 00 12,639.5 9.1229 1.2362 5444 00 14.194.1 9.7673 13546 5346 0.0 14.635.6 Liabilities & Stockholders' Equity Accounts Payable Accried Liabilities Accrued Taxes Total Current Libilities Total Long Term Debt 506.2 7824 528 1,3484 7,0132 7579 736.4 1114 1.605.7 7.627.9 786,0 835.7 RA1 1.7518 8.428,0 758.0 819.7 1293 1.707.0 9.180.3 3988 7212 Public Liability & Property Damage Deferred Taxes Commitments & Contingencies Minority Interest Total Liabilities 3535 4621 00 20 9.207.2 00 00 10,3536 391.7 849.7 0.0 49 11.4261 3743 6060 0.0 127 11.910.3 Total Equity 19218 2285.8 27679 27259 Total abilities & Equity 11.1290 12.6394 14.19.0 14.6362 Reprod beder for 2005 Saus dienestalo od old 2000-04 de og Data source: Consortium internal documentation Exhibit 4 Exhibit 4 Bidding for Hertz: Leveraged Buyout U.S. Rental Car Market Revenues (1996-2005) (S billions) $25 $20 5194 5182 $17.2 12.6 517.6 $15.6 $164 5165 $15 $14.6 $10 $5 so 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 Data source: Auto Rental News, 2006. Exhibit 5 Bidding for Hertz: Leveraged Buyout Proposed Financing for the Hertz Buyout HOUS 51300 m 100 g AB 56.700 TRACT 51,00 TL $450 SAL 3300 Se 5230 S100 Am SEO Tin De OS Source: Consortium documentation, Hertz Global Holdings, Inc. form S-1A, 11/13/2006, and author estimates Source: Consortium documentation, Hertz Global Holdings, Inc. form S-1A, 11/13/2006, and author estimates A A Exhibit 6 Bidding for Hertz: Leveraged Buyout Debt and Purchase-Price Multiples for Leveraged Buyouts Greater than $50 Million) 9.00 500 700 6.00 5.00 Multiples of EBITDA 400 3.00 2.00 11 100 0.00 1997 1998 1999 2000 2001 2002 2003 2004 2005 Senior Debt/EBITDA 3.77 232115 2.00 2.75 1.24 4.26 Sub Debu/EDITOA 1.50 2.12 151 1.13 142 1.63 1.65 Others 0.09 0.12.15 0.11 0.07 0.16 0.20 0.13 0.12 Lquity/tasi 2.40 243 2.6 2.15 2.29 253 2.59 2.31 2.57 1.25 Ft/EBITDA Others Sub Debt/RTDA Senior Debt/EBTOA harkum tha is all are Dals Olara Data source: Standard & Poor's, a division of the McGraw-Hill Companies, Inc. Exhibit 7 Bidding for Hertz: Leveraged Buyout Valuation Schematic for Hertz Transaction RAC Operating Company RAC Fleet Pro Forma Adjusted EBITDA (1) Flet Book Valeo Adjusted EBITDA Multiple -Regourd Peet Equity (2) - Operating Company Valur Net Book Value of Plet Total RAC Segment Value Operating Company Value Fler Vale RAC Transactina Value HERC Segment Value Gross EBITDA EBITDA Mulle HERC Transaction Value AA Source: Consortium internal documentation, adapted by author. Exhibit 8 Bidding for Hertz: Leveraged Buyout Projected Income Statement (S millions) 2005 200 2005 2009 2010 Hun Sewa RAC RRR Direct EX SCRA GERDA Feet Det Fleet Interest Adinted EHITDA 5.0617 152 2.2065 1.2 353 LORS 2.510.5 1.5147 2. 5577 633 10 27025 16520 70120 LO 25578 L7520 179.0 TS 7.763 LO 170 LARS 366 327 8.7335 2 27 1.9220 4783 600 14 1,3580 1.6133 L11 HRC River Direct OE SOBA GEHITDA Fleet Deprecate Peventer Add FRIDA 5520 2230 w 11 07 2105 00 IS 2005 00 4 1.7101 WS 703 27 10 4556 7176 25 00 1 1,8407 LOS 4 3075 20 S019 22:00 ThreCourtal Total Adjusted EBITDA RAC None De HERC No Feat Depeche Operating Coupany Bota 8002 1859 1544 1. OR 1980 20 12.5 1163 1610 60 9233 160 0 L1128 13653 1680 170 1103 6185 7126 Oponese Tennom ficky RAD ON SA14 y 7 Free 78 Seniorum Exhing, TX Seart 10 Total Ops pente 1440 280 158 1775 560 11 MO 158 1775 500 630 107 20 155 1775 900 10 100 1A 210 15.8 1775 120 PRO 158 1775 500 630 52 0001 21 IN 67 Pantalone Book Tow) 1577 505 1009 2583 WD 1653 3044 100 2004 607 7210 1010 241 BB 2113 CERITA 10112 LIR LMS 123 LOR 20051FMELO Tube for me etween the theme to ABS RAC A EBITDA HERCO BITDA Cam Authentimate from time to lahal Holtin in form CIA A A CADIL Bidding for Hertz: Leveraged Buyout Projected Balance Sheet (1) ($ millions) 194 199 1.2002 1. 74 111 26 12.490 1200 1 17 10 1100 10400 1313 10 2.550 1535 1500 3.913 20 1474 2013 2018 22.12 10 1 110 111 167 26 2.10 2005 PF 2001 Ass Candles 160 172 Caban 317 30 Aero Real 104 100 11 Manecas CM 713 laves 100 100 ) 113 131 Ohes A 2 22 13 Tolmus 2.60 200 2292 105 11 750 RAC Peel 1701 361 HOC 2222 2016 PPEEN 145 1. Coad 105 13 TA 175 IR Lind Sharp Alle 734 Arred Accede 102 Total 10 15 Loomade Today RAG, IND II US ABS, LO 4900 farm AS m INO 2.000 BARS 600 The ARS by 0 0 SALT Sense STON 2000 Exod. Seade os 1890 500 40 Totalling om te 120 Il 1 Pay & Property 14 174 304 Dews More 12 To 12 17 Tuy 2 ZI 27 Today 175 17 talailail anses RAC 1773 S. 2001 1993 53 2575 600 0 1314 6.16 270 400 40 200 200 2000 TO 1 00 10 16 01 374 11 1700 1104 200 29.01 TT Source: Author estimates from consortium documents and Hertz Global Holdings, Inc. form S-1 A, 11/13/2006 Exhibit 10 Bidding for Hertz: Leveraged Buyout Projected Cash Flows to Operating Company (1) 161202 im mnim Buyout Source: Author estimates from consortium documents and Hertz Global Holdings, Ine form S-1A, 11/13/2006, AA Exhibit 10 Bidding for Hertz: Leveraged Buyout Projected Cash Flows to Operating Company(l) (5 millions) 2006 2007 2008 2009 Net Income 1653 252.4 3113 4086 Ad case in deferred taxes 532 19.5 443 384 AM: HERC e depreciation 2495 2005 257 298.5 Adele Reet deprecation 1962 2020 2060 200.0 Less: HERCR CAP EX 4107 47.7 430,0 4133 Less total on feet CAP EX 2870 2198 202.6 223 2 Les increase in NWC -1158 163 SO 343 Lesset et equity requirement 1942 795 7249 Cash Flow available to pay down debe -517 -198 SAR 2104 Add operating company teres after tax 3099 3126 3136 3086 Free Cash Flow to Capital (ied 2583 2828 4124 51R.. Dayaaraan - AC he 2010 1340 34.7 3075 2120 387.4 542 37.0 EDA 2486 2077 5063 Source: Author estimates from consortium documents and Hekz Global Holdings, Inc. form S-1A, 11/13/2006. Exhibit 11 Bidding for Hertz: Leveraged Buyout Comparable Company Analysis (5 millions) TNT RA nes whe WI AR IN ST + mm HIR EE SERIE Source: Consortium internal documentation on LBO. Information on business segments is from Hertz Global Holdings, Inc, 3/30/2007 Form 10-K (Annual Report) (Park Ridge, NJ: Hertz Global Holdings, Inc., 2007) U.S. Department of Transportation Consortium internal documentation on Hertz LBO. Keith Bradsher, "The Top Spot at Ford is Returning to a Ford," New York Times, September 12. 1998 Kathleen Kerwin, "Ford's Long, Hard Road," Business Week (October 7, 2002). 10 Tim Burt and Nikki Tait, "The King of Detroit: Man in the News: Bill Ford." Financial Times, November 3, 2001 Bernard Simon, "Ford Hit by Falling North American Sales," Financial Times, July 19,2005. In January 2001 when Nasser repurchased Hertzoutstanding shares, Ford paid $710 million for the 18.5% of the company it did not already own. It paid $35.50 per share or an 18% premium for Hertz's shares. The acquisition implied a value of approximately $3.8 billion for Hertz equity at the time During 2004, Herte purchased 85% of its U.S. and 74% of its international cars under fleet-repurchase programs with automobile manufacturers. Under these programs, automobile manufacturers agreed to repurchase the cars at a specified price subject to certain car conditions and mileage requirements. The repurchase programs limited the residual risk that Hertz bore on "program cars. The average holding period for a new car was 11 months in the United States and 8 months in its international operations. Consortium internal documentation for Hertz LBO Although the ABS debt was floating rate, there were swak agreements to hedge interest-rate rink such that a good portion of the interest payments would be at a fixed rate rather than a floating rate. The case assumes fixed-rate payments. The international ABS debt was estimated 10 have a higher interest rate of 4.9% There were several iterations of the estimated financing for the transaction. The financing shown in Exhibit is closer to the actual financing used. Flexibility was built into the financing through the term loan facility and a fleet financing facility (which was unfunded at closer. It was common industry practice to value the rental fleet separately from the operating company Purchase price and other deal metrics were based on Herts Corporate EBITDA, which was the total of the operating flows of its two business units (i.e., the sum of RAC Adjusted EBITDA+HERC Gross EBITDA). Working capital (niet of cash) was assumed to be maintained at 2005 percentages for the most part, though receivables arising from repurchases of cars by manufacturers were projected to decline as a percentage of sales. Necessary cash (cash and cash equivalents line item) was set at 2% of sales. The projections also built in a small increase in HERC equipment efficiency, PPE, net (nonfleet PPE), was expected to declina more significantly as a percentage of sales. Bidding for Hertz: Leveraged Buyout Overview In late summer 2005, Greg Ledford, managing director and head of automotive and transportation buyouts at the Carlyle Group, found himself examining his BlackBerry atop the Great Wall of China. Though he had planned to be sightseeing with his daughter, his immediate focus was to finalize the terms of the second-largest leveraged buyout in history. The target in question was Hertz, a subsidiary of the Ford Motor Company, which was up for sale. Ledford needed to decide the price he and his co-investors would offer for Hertz as well as assess the potential returns and risks of the deal. Already months of work, many dollars of due diligence, and arrangement of tentative financing had gone into the bid. Complicating matters, he knew he faced tough competition from a rival buyout group, no doubt engaged in a similar process. The race to win Hertz had been set in motion several months earlier, when William Clay Ford Jr., the chairman and CEO of Ford, announced plans to explore "strategic alternatives for Hertz in April 2005. That announcement was followed in June 2005 by the filing of an S-1 registration statement setting up a "dual track process that would result in a Hertz IPO should other sale prospects fail. Ledford, who spoke to senior Ford managers on a regular basis, had gleaned that there was interest on Ford's part for an outright sale of Hertz. He believed a private sale that was competitive with an IPO would be viewed favorably by Ford due to its greater up-front cash proceeds and certainty of execution. When no strategic buyer surfaced, Carlyle, Clayton, Dubilier & Rice (CD&R), and Merrill Lynch Global Private Equity (collectively "Bidding Group") joined forces to bid on Hertz. It faced competition from another buyout consortium that included Texas Pacific Group, Blackstone, Thomas H. Lee Partners LP, and Bain Capital LLC. Hertz Ownership History Hertz's ownership history was characterized by a series of sales, public offerings, and leveraged buyouts (Exhibit 1). The company was first established in 1918 by 22-year-old Walter L. Jacobs as a car rental operation with a modest inventory of 12 Model T Fords that Jacobs personally had repaired and repainted. The venture was immediately successful, leading Jacobs to expand and generate annual revenues of approximately $1 million within five years. At the $1 million mark, in 1923, Jacobs sold his company to John Hertz, president of Yellow Cab and Yellow Truck and Coach Manufacturing Company, who gave his name to the company, creating "Hertz Drive-Ur-Self System" and a brand name that had endured ever since. John Hertz sold his investment three years later to General Motors (GM). In 1953, GM in turn sold the Hertz properties to the Omnibus Corporation, which simplified the company's name to "The Hertz Corporation" in connection with a public stock offering on the New York Stock Exchange (NYSE). In late 1987, together with Hertz management, Ford Motor Company participated in a management buyout of the company. Hertz later became an independent, wholly owned subsidiary of Ford in 1994. Less than three years later, Ford issued a minority stake of shares through a public offering on the NYSE on April 25, 1997. In early 2001, Ford reacquired the outstanding shares of Hertz and the company again became a wholly owned subsidiary of the Ford Motor Company. Partially due to 9/11, off-airport rentals, which consisted primarily of insurance replacement (rentals provided by insurance companies while the policyowner's automobile was out of service), local business travel, and leisure travel, had recently grown at a faster pace than had airport rentals. The Equipment Rental Market As of August 2005, the size of the North American equipment rental market in revenues was believed to be $25 billion, while that of France and Spain were approximately $4 billion and $2 billion, respectively. But because HERC only offered certain types of equipment, Hertz's applicable market was somewhat smaller. The equipment rental market was more variable than the car rental market and depended mostly on industrial productivity, particularly commercial and residential construction. Over the past 15 years, the best estimates of growth suggested the market had grown at an annual rate of approximately 9.7%. During this time, there was a trend toward companies in need of equipment renting rather than owning it, which was expected to continue. The market had experienced rapid growth in the 1990s but had slowed considerably between 2000 and 2003 with the decline in the economy. The equipment rental market had recently started to rebound from the 2000-03 levels, a rebound which was expected to continue. Unlike the car rental market, the U.S. equipment rental industry was highly fragmented with few national competitors. Other major national scale operators like Hertz included United Rentals, Inc., and RSC Equipment Rentals, a division of the Atlas Copco Group. The equipment rental business was highly competitive, and rental prices had started declining in 2001 and did not improve in North America until 2004. Prices in France and Spain had yet to stop declining." Instead of a concentrated source of revenues (U.S. airports), customers of the equipment rental industry were widely scattered throughout the country. This complicated the distribution of equipment and reduced the opportunity to achieve scale in operations, encouraging local players to compete with large businesses. Nonetheless, Hertz was a top player in the industry, ranking third based on 2005 revenues. Hertz's diverse customer base also helped to alleviate some of the risks of cyclicality and seasonality present in the industry. Tough Times at Ford Ford's acquisition of Hertz in January 2001 reflected the strategy of its then CEO and president, Jacques A. Nasser. Nasser had been promoted from president of Ford's worldwide automotive operations to become CEO in December 1998. At the same time, Bill Ford Jr., a great-grandson of Henry Ford, assumed the role of company chairman. Nasser's strategy was to turn Ford into something, anything, other than a traditional car company. He attempted to shrink Ford's mainstream automotive divisions and remake it into a leading consumer company in automotive products and services. Known for his abrasive style, Nasser frenetically pursued his strategy, jetting around the world and working 20-hour days. He acquired Volvo, Land Rover Hertz, and spent billions pursuing noncore operations. During Nasser's three-year tenure, Ford's once- impressive $15 billion cash reserve dwindled to less than $1 billion by 2001.6 In November 2001, Bill Ford Jr. assumed the CEO role at Ford replacing Nasser. After the turbulent years of Nasser, Bill Ford's ascension to CEO was greeted enthusiastically. But Ford inherited a company that had lost $5.5 billion the previous year and whose future held great uncertainty. While Ford had a strong line of a In November 2001, Bill Ford Jr. assumed the CEO role at Ford replacing Nasser. After the turbulent years of Nasser, Bill Ford's ascension to CEO was greeted enthusiastically. But Ford inherited a company that had lost $5.5 billion the previous year and whose future held great uncertainty. While Ford had a strong line of trucks, its passenger car line was lagging. By mid-2002, Ford was losing $190 per vehicle because of its bloated cost structure and intense pricing pressure from competitors. Although Ford proposed several restructuring plans that would reduce costs and reenergize its passenger car line, his plans were not enough to stem the company's decline. By the time he announced the company's intentions to explore strategic options for Hertz in April 2005, Ford's stock price had fallen to less than $10 per share. The company continued to lose money, especially in its North American operations. Rumored to be facing a potential downgrade in its bond rating, Hertz looked to be a viable candidate for Ford to raise some much-needed cash to shore up its bond rating and attempt to return its car operations to profitability. Hertz as an LBO candidate Although Ford owned 100% of Hertz, Hertz had operated largely without oversight by or obligation to Ford. Members of the Bidding Group had individually evaluated Hertz and believed it to be an attractive leveraged buyout candidate. Operating Synergies Hertz's two business segments presented large opportunities for operational improvement. The key drivers of the rental car business included the number of fansactions, the length of each rental, revenue per rental day, and fleet utilization. Transaction volume, which was a good indicator of market demand, typically followed growth in the general economy and enplanements. Rental length was largely dependent on customer and end- product mix. Leisure and insurance renters generally rented cars for longer periods than business travelers. Another major driver of revenues was price, or revenue per rental day. Utilization of the fleet also played an important role in determining profitability and return on assets. Improvement in any of these drivers had the potential to yield substantial increases in revenue. With travel finally beginning to rebound after the events of 9/11, the near-term market trends appeared favorable, and management had projected transaction volume to grow 6.9% in 2005. With respect to price, the Hertz brand was exceptionally strong and recognized worldwide. Hertz had shown an ability to sustain a premium pricing strategy, which was in part due to its loyal customer base. Although Hertz was the price leader in the market, it could not impose higher rates if competitors chose not to follow. Hertz was one of the largest private sector purchasers of new cars in the world. In 2004, the company operated a peak fleet of 300,000 cars in the United States and approximately 169,000 in its international operations. Fleet usage was highly seasonalit peaked in the second and third quarters of the year and declined in the first and fourth quarters as leisure travel waned. Significant cost savings could arise from right sizing the fleet (purchasing and disposing of cars) to match seasonal demand. Historically, Hertz had purchased the majority of its cars from Ford, but in recent years, it had moved to decrease its reliance on Ford vehicles. In part, this was in response to U.S. auto manufacturers' decision to reduce fleet sales to bolster their own profitability. This had two effects on Hertz and its competitors. First, it increased vehicles costs and second, it An increase in increased the proportion of "at risk" vehicles potentially subject to declining residual values. 10 --- part, this was in response to U.S. auto manufacturers' decision to reduce fleet sales to bolster their own profitability. This had two effects on Hertz and its competitors. First, it increased vehicles costs and second, it increased the proportion of "at risk" vehicles potentially subject to declining residual values. An increase in 10 vehicle costs in 2006 was expected to increase Hertz's acquisition costs and hence fleet capital spending by proportionately more than the previous year, The Bidding Group compared Hertz with peer firms and with its own historical results to identify the following operational savings." 1. Current adjusted EBITDA margins were approximately 400 basis points (bps) below 2000 levels and were 100 to 200 bps below those of Avis. 2. From 2002 to 2005E nonfleet-related operating expenses had increased by 38% and had outpaced revenue growth by 6%. 3. Hertz's off-airport growth strategy had resulted in significant losses. The Bidding Group would look to rationalize this strategy. 4.U.S. RAC's nonfleet capital expenditures (CAPEX) as a percentage of sales were considerably higher than Avis's long-term CAPEX levels. 5. Europe RAC's SG&A as a percentage of sales and on a per-day basis were three times higher than those in the United States. 6. HERC's return on assets lagged that of competitors, reflecting an inefficient use of capital. In 2005, HERC's rental revenue on fleet assets was projected to be 70.5%. By comparison, the returns for RSC and United Rentals were expected to be 85% and 116%, respectively. All told, the Bidding Group believed that an amount between $400 million and $600 million in annual EBITDA savings (relative to 2005 levels) was attainable by 2009. These estimates of operational improvements were confirmed by external industry advisors who had been hired as part of due diligence. The Bidding Group had also carefully evaluated Hertz's management team. The current management team had considerable industry experience but, partially as a result of Ford's hands-off management style, they operated in an insular manner and not been pressured to excel. The existing compensation structure was based on market share, and new incentive plans were planned that would target cash flow and capital usage metrics. If removal of the current CEO, Craig Koch, proved necessary, an experienced manager, George Tamke, had been identified to step in. Tamke, who was currently a partner at CD&R, was formerly vice chair and co-CEO of Emerson Electric, and had successfully led CD&R's Kinko's transaction. Financial Synergies In addition to operational savings, the Bidding Group had identified several sources of financing value, most notably debt that could be backed by Hertz's fleet of rental cars (asset-backed securitized debt). By contrast, Ford bad opted to rely mainly on more expensive unsecured financing. Asset-backed securitized (ABS) debt was a form of financing commonly used by financial institutions to remove illiquid assets from their balance sheets (such as mortgages or credit card receivables) and raise cash from them. ABS financing required the creation of a special purpose vehicle (SPV) to facilitate its issuance. An SPV was set up to achieve legal isolation of the assets from the original holder of the assets or "originator." The originator conveyed the assets to the SPV (or trust), which transferred ownership of the assets from the ine originator conveyed the assets to the Srv (or trust), which transiered ownership of the assets from the originator to the trust. The SPV would then issue securities backed by the assets of the trust. The interest and principal on the securities were paid from the receipt of cash flows that arose from the trust assets. Because the debt issued by the trust was nonrecourse to the originator, an important benefit of ABS was that the credit rating on the debt was based on the trust assets rather than the originator's assets. The proceeds raised from the sale of asset-backed securities to investors were returned to the originator, thereby enabling illiquid assets of the originator to be turned into cash. Although ABS financings were commonplace, this form of financing had never been used in a buyout before Hertz In Hertz's case an SPV ("RAC Fleet") would be set up to retain legal ownership of the rental car fleet and its associated debt. Hertz would make payments in the amount of the fleet depreciation and interest to RAC Fleet, such that it effectively sold the fleet to the SPV and then leased it back (i.e, the depreciation and interest payments effectively represented the operating lease payments). Furthermore, as Hertz acquired (deposed of) cars, it had agreements to increase (decrease) the ABS debt. Investors who purchased ABS debt would be paid through the lease payments Hertz remitted to RAC Fleet. Through a combination of these payments and credit enhancement (including the purchase of insurance for the ABS assets), Hertz hoped to be able to raise $6.1 billion in secured debt at an AAA rating, which was considerably higher than Hertz's current rating of BBB- The ABS debt carried a low interest rate for LBO-type financing, estimated at about 4.5%.12 The Bidding Group believed it held a distinct advantage with respect to financing. Early in the process, it had entered into a financing arrangement with Lehman Brothers and Deutsche Bank to provide ABS debt financing for the transaction. Lehman Brothers and Deutsche Bank held a 90% market share in the ABS market for rental car financing. Not only was the ABS debt less expensive but it also provided a more flexible financing arrangement that allowed for the debt to increase and decrease with fleet size. Deal Structure Given the large deal size, the ABS debt was not the only source of financing needed to finance the buyout. Exhibit 5 shows the proposed financing for the transaction. Although $1,400 million of existing debt would roll over, for the most part, Carlyle and the consortium members planned to raise new debt to finance the deal. In total, the nonequity funding for the transaction was approximately $12.5 billion." In the summer of 2005, the debt and LBO market had recovered from the lows following the 2001 slowdown. Senior debt, which had fallen to 2.38* EBITDA in 2002, had since recovered to 3.24x EBITDA in 2004. Further relaxation of lending standards had occurred over the course of 2005 and senior debt multiples were expected to close above 4x EBITDA by year end 2005. Deal valuation had followed suit, purchase- price multiples, which had fallen to around 6x EBITDA in 2001, had expanded to more than 8 EBITDA in 2005. Exhibit 6 shows the recent history of debt and purchase price multiples. Valuation of Hertz The Bidding Group planned to set up both RAC and HERC as separate legal entities within a holding company named "Hertz Corporation" or "HertzCo" in part due to the decision to use ABS financing, and because later it might facilitate separate disposals of the properties. HertzCo consisted of the two business segments: RAC and HERC. RAC was made up of RAC Operating Company (OpCo), which held claim to the cash flows and nonfleet assets of the car rental company, and RAC Fleet, the subsidiary which housed the Pantolor float LED hala enim in the nach Arad matalinace Thin representation RAC could be valued by applying an appropriate multiple to RAC OpCo's operating flows and then adding the net book value of the fleet. Due to its relatively short life, the fleet had a fairly transparent market value, which was well approximated by its book value. Because of the ABS debt, the operating company's flows had to be adjusted to reflect the depreciation and interest payments made to RAC Fleet. In essence, the service obligations on the fleet had to be met before the providers of LBO financing were paid. RAC Adjusted EBITDA was therefore RAC Gross EBITDA less fleet depreciation and fleet interest. HERC could be valued by applying an appropriate multiple to HERC Gross EBITDA (Revenues less Direct Operating and SG&A Expenses).15 HERC did not utilize ABS debt because the market value of equipment rentals was less transparent (due to longer lives and diverse usages). Exhibits 8 and 9 contain a base-case pro forma income statement and balance sheet with projections for 2006-10. Given projected enplanements, car-rental growth was estimated to slow to 4.5% by 2009 and stabilize at that level. Though the equipment rental market had started to rebound from a cyclical slowdown, equipment rental growth at Hertz had been much more variable, and it was eventually expected to decline over time and to stabilize at 3% by 2010. The base-case estimates build in the low end of $400 million in operational savings over time and incorporate the segment revenue growth rates noted above. RAC fleet expenditures (and ABS debt) were expected to increase as a percentage of sales due to higher vehicle costs, leading to corresponding increases in RAC depreciation.' Exhibit 10 combines the operating cash flows of the two divisions and provides cash-flow projections for 2006-10. Although it was not possible to directly estimate a beta for Hertz, comparable company equity betas were around 1.5, which, when de-levered, yielded unlevered betas of approximately 0.60. But there was a wide range to these estimates. Interest rates as of August 2005 and market multiples are shown in Exhibit 11. The Decision Any bid put forth by the Bidding Group for Hertz would have to satisfy three critical tests. First, it would have to provide adequate returns to the sponsors' limited partners. Second, it would have to be higher than Ford could receive from an IPO, Third, the bid would have to best that of the rival bidding group. Time was drawing to a close, and Carlyle and its partners needed to finalize their bid. Ledford knew that his investment committee would not only be keenly interested in the possible returns they could expect from Hertz, but also in his views on the risks of the deal and bidding strategy. Although much work had been done, much more lay ahead. It was not turning out to be the vacation he planned. 16 Exhibiti Bidding for Hertz: Leveraged Buyout Hertz Ownership History EM H 1 M Source: Hertz Corporation Exhibit 2 Bidding for Hertz: Leveraged Buyout Hertz Historical Consolidated Income Statement (S millions) 2002 2003 2004 2005E RAC Revenue Direct Op Ex & SGRA Cross EBITDA Fleet Depreciation Fleet Interest Adjusted EBITDA $4,5427 26763 1.8664 1.2167 2709 3788 $48522 29139 1.908.3 1256.4 276 2 3757 $5.4901 3,3939 2.0962 1.2319 3102 5541 56,0617 38452 2206.5 1.3622 3801 1542 HERC Revenue Direct Op Ex& SGRA Gross EBITDA Fleet Depreciation Fleet Interest Adusted EBITDA 1.095.7 7222 373.5 2828 954 -47 1085 7179 3636 257.0 789 177 1.1859 749.6 4363 2314 743 130.6 1.358.0 805.1 5529 2280 366 2283 Total Adjusted EBITDA Non-Fleet Depreciation Operating Company Interest Expense 3741 1576 00 3934 156.0 0.0 687 1827 00 es 1847 00 Pretax Inc 2165 2374 SOT Exhibit 2 Bidding for Hertz: Leveraged Buyout Hertz Historical Consolidated Income Statement ($ millions) 2002 2003 2004 2005E RAC Revenue Direct Op Ex & SG&A Gross EBITDA Fleet Depreciation Fleet Interest Adjusted EBITDA $4,5427 2,6763 1.866.4 1,216.7 270.9 378.8 $4.8522 2.943.9 1.908.3 1.256.4 2762 375.7 $5.490.1 3,393.9 2,096.2 1.231.9 310.2 554.1 $6,0517 3,845,2 2 206.5 1,362.2 380.1 4642 1.095.7 7222 373.5 2828 95.4 1,0815 7179 3636 2670 78.9 17.7 1,1859 749.6 436.3 2314 74.3 130.6 1,358.0 805.1 5529 228.0 96.6 2283 po 4.7 HERC Revenue Direct Op Ex & SG&A Cross EBITDA Fleet Depreciation Fleet Interest Adjusted EBITDA Total Adjusted EBITDA Non-Fleet Depreciation Operating Company Interest Expense Pretax Income Book Taxes Minorky Interest 374.1 157.6 00 3934 1560 00 6847 1827 0.0 6925 184.7 0.0 216.5 779 0.0 237.4 85.5 0.0 5020 180.7 3.2 5078 1829 9.7 $138.6 $151.9 $321.3 $324.9 Net Income Reflect pre-LBO astumated set income for 2005 Data source: Consortium internal documentation Data source: Consortium internal documentation Exhibit 3 Bidding for Hertz: Leveraged Buyout Hertz Historical Consolidated Balance Sheet ($ millions) 2002 2003 2004 2005EM) Assets Cash and Equivalents Fleet Cash Enhancement Accounts Receivable Manufacturer Receivables Inventories Prepaid Expenses Other Assets Total Current Assets 6013 00 799.1 473.8 71.8 838 423 2.0721 1.110.1 00 13082 5119 73.4 903 456 3.1395 1.237.9 00 1.225.1 600.1 83.3 100.1 441 3.290.6 1.1029 00 1.0042 629.7 92.7 1131 36.5 29791 Fleet. Net PP&E Net Existing Goodwill & Intangibles New Goodwill & Intangibles Total Assets 74258 1.111.8 519.0 20 11.1287 7.7833 1.169.8 536.9 00 12,639.5 9.1229 1.2362 5444 00 14.194.1 9.7673 13546 5346 0.0 14.635.6 Liabilities & Stockholders' Equity Accounts Payable Accried Liabilities Accrued Taxes Total Current Libilities Total Long Term Debt 506.2 7824 528 1,3484 7,0132 7579 736.4 1114 1.605.7 7.627.9 786,0 835.7 RA1 1.7518 8.428,0 758.0 819.7 1293 1.707.0 9.180.3 3988 7212 Public Liability & Property Damage Deferred Taxes Commitments & Contingencies Minority Interest Total Liabilities 3535 4621 00 20 9.207.2 00 00 10,3536 391.7 849.7 0.0 49 11.4261 3743 6060 0.0 127 11.910.3 Total Equity 19218 2285.8 27679 27259 Total abilities & Equity 11.1290 12.6394 14.19.0 14.6362 Reprod beder for 2005 Saus dienestalo od old 2000-04 de og Data source: Consortium internal documentation Exhibit 4 Exhibit 4 Bidding for Hertz: Leveraged Buyout U.S. Rental Car Market Revenues (1996-2005) (S billions) $25 $20 5194 5182 $17.2 12.6 517.6 $15.6 $164 5165 $15 $14.6 $10 $5 so 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 Data source: Auto Rental News, 2006. Exhibit 5 Bidding for Hertz: Leveraged Buyout Proposed Financing for the Hertz Buyout HOUS 51300 m 100 g AB 56.700 TRACT 51,00 TL $450 SAL 3300 Se 5230 S100 Am SEO Tin De OS Source: Consortium documentation, Hertz Global Holdings, Inc. form S-1A, 11/13/2006, and author estimates Source: Consortium documentation, Hertz Global Holdings, Inc. form S-1A, 11/13/2006, and author estimates A A Exhibit 6 Bidding for Hertz: Leveraged Buyout Debt and Purchase-Price Multiples for Leveraged Buyouts Greater than $50 Million) 9.00 500 700 6.00 5.00 Multiples of EBITDA 400 3.00 2.00 11 100 0.00 1997 1998 1999 2000 2001 2002 2003 2004 2005 Senior Debt/EBITDA 3.77 232115 2.00 2.75 1.24 4.26 Sub Debu/EDITOA 1.50 2.12 151 1.13 142 1.63 1.65 Others 0.09 0.12.15 0.11 0.07 0.16 0.20 0.13 0.12 Lquity/tasi 2.40 243 2.6 2.15 2.29 253 2.59 2.31 2.57 1.25 Ft/EBITDA Others Sub Debt/RTDA Senior Debt/EBTOA harkum tha is all are Dals Olara Data source: Standard & Poor's, a division of the McGraw-Hill Companies, Inc. Exhibit 7 Bidding for Hertz: Leveraged Buyout Valuation Schematic for Hertz Transaction RAC Operating Company RAC Fleet Pro Forma Adjusted EBITDA (1) Flet Book Valeo Adjusted EBITDA Multiple -Regourd Peet Equity (2) - Operating Company Valur Net Book Value of Plet Total RAC Segment Value Operating Company Value Fler Vale RAC Transactina Value HERC Segment Value Gross EBITDA EBITDA Mulle HERC Transaction Value AA Source: Consortium internal documentation, adapted by author. Exhibit 8 Bidding for Hertz: Leveraged Buyout Projected Income Statement (S millions) 2005 200 2005 2009 2010 Hun Sewa RAC RRR Direct EX SCRA GERDA Feet Det Fleet Interest Adinted EHITDA 5.0617 152 2.2065 1.2 353 LORS 2.510.5 1.5147 2. 5577 633 10 27025 16520 70120 LO 25578 L7520 179.0 TS 7.763 LO 170 LARS 366 327 8.7335 2 27 1.9220 4783 600 14 1,3580 1.6133 L11 HRC River Direct OE SOBA GEHITDA Fleet Deprecate Peventer Add FRIDA 5520 2230 w 11 07 2105 00 IS 2005 00 4 1.7101 WS 703 27 10 4556 7176 25 00 1 1,8407 LOS 4 3075 20 S019 22:00 ThreCourtal Total Adjusted EBITDA RAC None De HERC No Feat Depeche Operating Coupany Bota 8002 1859 1544 1. OR 1980 20 12.5 1163 1610 60 9233 160 0 L1128 13653 1680 170 1103 6185 7126 Oponese Tennom ficky RAD ON SA14 y 7 Free 78 Seniorum Exhing, TX Seart 10 Total Ops pente 1440 280 158 1775 560 11 MO 158 1775 500 630 107 20 155 1775 900 10 100 1A 210 15.8 1775 120 PRO 158 1775 500 630 52 0001 21 IN 67 Pantalone Book Tow) 1577 505 1009 2583 WD 1653 3044 100 2004 607 7210 1010 241 BB 2113 CERITA 10112 LIR LMS 123 LOR 20051FMELO Tube for me etween the theme to ABS RAC A EBITDA HERCO BITDA Cam Authentimate from time to lahal Holtin in form CIA A A CADIL Bidding for Hertz: Leveraged Buyout Projected Balance Sheet (1) ($ millions) 194 199 1.2002 1. 74 111 26 12.490 1200 1 17 10 1100 10400 1313 10 2.550 1535 1500 3.913 20 1474 2013 2018 22.12 10 1 110 111 167 26 2.10 2005 PF 2001 Ass Candles 160 172 Caban 317 30 Aero Real 104 100 11 Manecas CM 713 laves 100 100 ) 113 131 Ohes A 2 22 13 Tolmus 2.60 200 2292 105 11 750 RAC Peel 1701 361 HOC 2222 2016 PPEEN 145 1. Coad 105 13 TA 175 IR Lind Sharp Alle 734 Arred Accede 102 Total 10 15 Loomade Today RAG, IND II US ABS, LO 4900 farm AS m INO 2.000 BARS 600 The ARS by 0 0 SALT Sense STON 2000 Exod. Seade os 1890 500 40 Totalling om te 120 Il 1 Pay & Property 14 174 304 Dews More 12 To 12 17 Tuy 2 ZI 27 Today 175 17 talailail anses RAC 1773 S. 2001 1993 53 2575 600 0 1314 6.16 270 400 40 200 200 2000 TO 1 00 10 16 01 374 11 1700 1104 200 29.01 TT Source: Author estimates from consortium documents and Hertz Global Holdings, Inc. form S-1 A, 11/13/2006 Exhibit 10 Bidding for Hertz: Leveraged Buyout Projected Cash Flows to Operating Company (1) 161202 im mnim Buyout Source: Author estimates from consortium documents and Hertz Global Holdings, Ine form S-1A, 11/13/2006, AA Exhibit 10 Bidding for Hertz: Leveraged Buyout Projected Cash Flows to Operating Company(l) (5 millions) 2006 2007 2008 2009 Net Income 1653 252.4 3113 4086 Ad case in deferred taxes 532 19.5 443 384 AM: HERC e depreciation 2495 2005 257 298.5 Adele Reet deprecation 1962 2020 2060 200.0 Less: HERCR CAP EX 4107 47.7 430,0 4133 Less total on feet CAP EX 2870 2198 202.6 223 2 Les increase in NWC -1158 163 SO 343 Lesset et equity requirement 1942 795 7249 Cash Flow available to pay down debe -517 -198 SAR 2104 Add operating company teres after tax 3099 3126 3136 3086 Free Cash Flow to Capital (ied 2583 2828 4124 51R.. Dayaaraan - AC he 2010 1340 34.7 3075 2120 387.4 542 37.0 EDA 2486 2077 5063 Source: Author estimates from consortium documents and Hekz Global Holdings, Inc. form S-1A, 11/13/2006. Exhibit 11 Bidding for Hertz: Leveraged Buyout Comparable Company Analysis (5 millions) TNT RA nes whe WI AR IN ST + mm HIR EE SERIE Source: Consortium internal documentation on LBO. Information on business segments is from Hertz Global Holdings, Inc, 3/30/2007 Form 10-K (Annual Report) (Park Ridge, NJ: Hertz Global Holdings, Inc., 2007) U.S. Department of Transportation Consortium internal documentation on Hertz LBO. Keith Bradsher, "The Top Spot at Ford is Returning to a Ford," New York Times, September 12. 1998 Kathleen Kerwin, "Ford's Long, Hard Road," Business Week (October 7, 2002). 10 Tim Burt and Nikki Tait, "The King of Detroit: Man in the News: Bill Ford." Financial Times, November 3, 2001 Bernard Simon, "Ford Hit by Falling North American Sales," Financial Times, July 19,2005. In January 2001 when Nasser repurchased Hertzoutstanding shares, Ford paid $710 million for the 18.5% of the company it did not already own. It paid $35.50 per share or an 18% premium for Hertz's shares. The acquisition implied a value of approximately $3.8 billion for Hertz equity at the time During 2004, Herte purchased 85% of its U.S. and 74% of its international cars under fleet-repurchase programs with automobile manufacturers. Under these programs, automobile manufacturers agreed to repurchase the cars at a specified price subject to certain car conditions and mileage requirements. The repurchase programs limited the residual risk that Hertz bore on "program