Jana Partners Dumping Half of Hertz Holdings

Activist campaign appears incomplete

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Dec 04, 2015
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Guru Jana Partners (Trades, Portfolio) seriously started racking up its exposure to Hertz (HTZ, Financial) at the end of 2014.

Ultimately Jana Partners (Trades, Portfolio) owned about 41 million shares of the car rental business that owns the Hertz, Dollar, Thrifty and Firefly brands. Its network of rentals spans the globe with storefronts across North America, Europe, Latin and South America, Asia, Australia, Africa, the Middle East and New Zealand. Back at the end of August the company started decreasing its exposure, but now it has seriously cut back on its stake, selling 44.70% at once.

With the earlier sale it has now halved the number of shares it once owned. It doesn’t appear to have been a great trade for the investment firm.

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Jana Partners (Trades, Portfolio) appears to take advantage of the relief rally that occurred after the company completed the restatement of its financial results to exit a good part of its stake. However it may also have something to do with Jana being unable to broker a merger or acquisition between United Rentals (URI, Financial) and Hertz. The fund earlier sold out of its United Rentals stake Sept. 30.

Still the sale is somewhat surprising the flock of activists that descended on Hertz, including David Einhorn (Trades, Portfolio), Daniel Loeb, Larry Robbins (Trades, Portfolio), Chase Coleman (Trades, Portfolio) and Carl Icahn (Trades, Portfolio), who did make some headway. Supposedly the company’s equipment rental business will be spun off in Q2 2016. Icahn oversaw the process of selecting a new CEO, and John Tague was brought in.

Management is engaging in inspired cost-cutting and integrating systems on the back end to achieve synergies behind the different chains. Finally, the company just executed on a $262 million stock buyback which was the first installment in a $1 billion buyback plan. Management has also been quite successful at achieving free cash flow improvements (from the earnings call, emphasis mine) :

Free cash flow for the first nine months of 2015 was $414 million, representing a $336 million improvement over the same period last year. This increase was primarily driven by a reduction in RAC fleet growth, resulting from higher fleet utilization, disciplined U.S. capacity growth and a higher overall advanced rate on fleet debts.

With that kind of free cash flow, the company isn’t expensive, trading at something like 12x. So why did Jana Partners (Trades, Portfolio) start selling out when the activist campaign appears to progress well but the turnaround is clearly incomplete, and the result of the investment is likely less than satisfactory?

It is a guessing game, but it is not the liquidity position or the risk of the investment as that appears to be moving in the right direction as well even though the company employs a lot of leverage (emphasis mine):

I'm pleased to report that we ended the quarter with a sequential improvement in our net leverage ratios and continue to make progress toward our target leverage level of 3.5 times by year end 2016. Our corporate liquidity remains strong, with a total $1.8 billion at quarter end, including $509 million of unrestricted cash and cash equivalents and $1.3 billion availability under our ABL facility. We continue to be disciplined in our nonfleet capital spending, having invested $58 million in the quarter, of which $19 million was related to a nonrecurring investment at our new corporate headquarters facility.

Therefore my best guess is that Jana Partners (Trades, Portfolio), after determining a corporate event isn’t in the cards aside from the spinoff, lowered its IRR estimates and now simply has better use for its money or can’t justify holding 40 million shares based on its updated risk/return model. Not everyone agrees though because notable recent buyers include Larry Robbins (Trades, Portfolio), Columbia Wanger (Trades, Portfolio), PRIMECAP Management, Mario Gabelli (Trades, Portfolio) and Manning & Napier Advisors Inc.