Why the 49% premium Avis paid for Zipcar is a bargain

Avis Budget Group, the car-rental company, has paid a 49% premium for Zipcar, a largely US urban rival that rents its cars by the hour. But it doesn’t signal Avis’s surrender to the idea that all-day rentals are a thing of the past. Rather, despite what looks like a high premium, Avis is taking advantage of a tough climate for Zipcar to buy the firm for a bargain and broaden its own offerings.

Zipcar closed at $8.24 per share on Dec. 31; Avis is paying $12.25, which amounts to a pricetag of $491 million. That may seem a lot, but Zipcar’s share price has been on one long slide since its heady, April 2011 initial public offering, when its founders were being compared with Henry Ford. It debuted at $18 a share, and immediately soared to $30. But it ended 2011 at $13.42 a share, and by Nov. 7, 2012, was down to $6. As of Sept. 30, 2012, the company had $71.8 million of accumulated debt on its books, just barely down down from its level a year earlier. (Zipcar earned $241.6 million in 2011, and $208.2 million as of Sept. 20, 2012.).

By embracing hourly customers, Avis now gets to cater to a wider market. One of the synergies is that Zipcar tends to be so busy on weekends that it turns away customers, the opposite problem faced by Avis, which has many empty cars on Saturdays and Sundays. Avis’s big rivals Hertz and Enterprise also offer or plan to offer by-the-hour rentals in the US. But at the same time, like its competitors in recent years, Avis been expanding its business through consolidation. Hertz has bought Dollar and Thrifty, Avis acquired Budget, and Enterprise bought Alamo and National. In 2011, Avis paid about $1 billion for Avis Europe, previously an independent licensee of the company, which it says has allowed it to nearly triple Budget’s market share in the region.