SOUTHFIELD, Mich. — Avis Budget Group Inc., once a skeptic about car sharing services, agreed to buy short-term rental pioneer Zipcar Inc. for $491 million, signaling a shift in the industry to embracing drivers who don’t want to own cars.
With the Zipcar deal, Avis Budget becomes the latest company to pursue the fast-growing market for young, urban customers who want to rent cars by the hour rather than owning their own vehicles. Enterprise and Hertz, the two largest U.S. car-rental companies, have already rolled out offerings for such customers.
Avis Budget Chief Executive Officer Ron Nelson said he’d been “somewhat dismissive of car sharing in the past,” in a call with analysts Wednesday. He said he had a change of heart when he realized how much growth and profit potential there is in providing hourly rentals to “younger, more wired consumers” in big cities and on college campuses worldwide.
“With more city living, more expensive gas, with it being more expensive to insure and buy cars, car sharing is a long- term business rather than just a flash in the pan,” said Fred Lowrance, an analyst with Avondale Partners in Nashville, Tenn., who follows the industry. “This is a pretty big leapfrog Avis just took in terms of market leadership. Before this, Avis wasn’t fully committed to car sharing.”
Avis Budget’s about-face came after Zipcar, founded in 2000, projected its first annual profit this year, of as much as $4 million. Zipcar’s board agreed to Avis Budget’s bid of $12.25 a share, a 49 percent premium on the Cambridge, Mass.- based company’s Dec. 31 closing price. That is also a 32 percent discount to Zipcar’s initial public offering price of $18.
“From day one, Avis is going to have a profitable business,” Lowrance said. “When an opportunity like that comes along, sometimes you just change your mind.”
The acquisition, which will mostly be financed with debt, will pay off in less than a year and begin adding to earnings next year, said David Wyshner, Avis Budget’s chief financial officer. Avis Budget expects the deal to close in the next few months.
The acquisition also enables Avis Budget to take the lead in the car sharing race. Zipcar has more than 760,000 members and is active in 20 cities in the U.S., Canada and Europe, the companies said Wednesday. The company operates at five sites in Tacoma – three downtown and one each on the campuses of University of Puget Sound and Pacific Lutheran University.
Prior to agreeing to the Avis offer, Zipcar’s board had received “expressions of interest from multiple parties,” Scott Griffith, Zipcar’s chief executive officer, said on the call. Griffith, who will remain CEO of Zipcar, declined to elaborate.