Hertz’s Complex Shareholder Payout Explained
Shareholders have several options for how to get paid as the rental-car company exits bankruptcy
Hertz Global Holdings Inc. is concluding a chapter 11 case that generated big gains for shareholders, who are usually an afterthought in corporate bankruptcies. Bullish individual investors, in particular, were drawn to Hertz and were rewarded for the risk they took on a bankrupt stock.
But many of Hertz’s backers are unfamiliar with the bankruptcy process and with their options to get paid under the company’s exit plan, which was approved by a judge Thursday. WSJ Pro Bankruptcy breaks down the choices facing Hertz shareholders, who face a Friday deadline for some parts of the payout.
Q: How are shareholders treated under the bankruptcy plan?
A: A bidding war among investment firms drove up Hertz’s value so much it was able to cover its debts in full, with value left over for equity. Current shareholders will receive $1.53 in cash per share, plus their proportion of a 3% stake in the restructured business set aside for shareholders, and warrants for an additional 18% stake.
The warrants are akin to options, conferring on their owner the right to buy shares at a certain price. If Hertz’s equity valuation surpasses $6.5 billion, the warrants are in the money. The more Hertz is worth beyond that threshold, the more valuable the warrants.
Certain accredited shareholders—institutional buyers and wealthier individuals—can forego the warrants and instead participate in an equity rights offering.
Q: Who can participate in the rights offering?
A: To qualify, individuals must have either a net worth of $1 million or more, or have generated at least $200,000 in income for 2019 and 2020 and can expect to earn the same in 2021. Otherwise, they and their spouse must have collectively earned more than $300,000 for 2019 and 2020 and expect to earn the same in 2021 to qualify.
Q: Why is the rights offering valuable?
A: Shareholders who participate in the rights offering will pay $10 a share, raising $1.635 billion in equity financing to ease Hertz’s exit from bankruptcy.
Through the rights offering, shareholders can buy shares in the company at a discount to Hertz’s own valuation under its bankruptcy plan. The stock sales are based on a theoretical $4.7 billion valuation, meaning that $1.635 billion will purchase 35% of the company.
Even if very few shareholders participate, there are certain large institutional investors who have agreed to backstop the stock sale, meaning that they will provide the full $1.635 billion to make sure no shares go unsold.
The warrants for shareholders who don’t participate are premised on an equity valuation of $6.5 billion, meaning that warrant holders are paying more to acquire shares, and can only do so if Hertz’s value rises to that level.
Q: Do shareholders who are ineligible for the rights offering have any decisions to make?
A: Yes. Those who are ineligible for the rights offering can still elect to sell their subscription rights to participate in the rights offering to other, qualified investors in a court-supervised auction.
Any shareholder who doesn’t want to participate in the rights offering and doesn’t want to sell their rights, can choose to accept their share of the warrants, plus the cash payout and 3% equity distribution.
If a shareholder doesn’t notify Hertz of their decision, they will automatically be granted the warrants.
Q: Is there a deadline?
A: The deadline to participate in the rights offering, and to put subscription rights up for auction, is Friday, June 11.