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Five Reasons Avis Budget Bagged Zipcar

 January 03, 2013 09:44 AM

When your industry is being disrupted by new technologies and business models, coopting or buying out the disrupters can be a wise move. And that strategy helps explain the Avis Budget Group's (CAR) roughly $500 million takeover of Zipcar (ZIP) for $12.25 a share.

Zipcar is the leading car sharing service, an arrangement where members pay an annual fee to rent a car for hours at a time. Users manage their rentals online and access their autos through smartphone apps or smart cards. Avis is paying a cool 49% premium over Zipcar's December 31 closing price. Here are five takeaways from the proposed buyout.

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1)  Keep your enemies close. Instead of losing younger, budget- conscious drivers to Zipcar and other car sharing services, Avis can now get a piece of the action. Avis CEO Ron Nelson, in a presentation released after the deal's announcement, notes that his company will get access to Zipcar's online expertise and mobile apps.

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2)  Two-way benefits: Avis in turn will expand Zipcar's growth potential with access to its larger car fleet. The global car sharing market is about $10 billion in the US, Europe and Asia compared to the $50 billion traditional rental car business, but it's growing faster. (Zipcar has enjoyed 28% average annual growth since 2008.) The transaction will start contributing to Avis' bottom line in year two, Nelson estimates.

3)  Big renter on campus: Zipcar has a huge following on some 300 college campuses in 20 major metropolitan areas. As these students advance in their careers and start families, Avis may be able to steer these younger consumers to its other car rental brands.

4)  Tidy Haul for Mr. Case: The Zipcar deal is a big victory for AOL founder Steve Case and his Revolution LLC fund for startups. The fund invested in the car sharing sector back in the mid-2000s and is major shareholder of Zipcar. Bloomberg estimates that Revolution stands to gross about $96 million after the sale to Avis closes.

5)  The market loves this deal. Stocks in both companies soared today. Check out this chart.

CAR data by YCharts

The post Five reasons Avis Budget bagged Zipcar appeared first on Smarter Investing.



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