Budget Group, Inc.

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Budget Group, Inc.

Suite 210
125 Basin Street
Day tona Beach, Florida 32114
U.S.A.
(904) 238-7035
Fax: (630) 955-7799
Web site: www.teamrental.com

Public Company
Incorporated: 1987 as Team Rental Group Inc.
Employees: 12,000
Sales: $1.30 billion (1997)
Stock Exchanges: New York
Ticker Symbol: BD
SICs: 4119 Local Passenger Transportation, Not Elsewhere Classified; 5271 Mobile Home Dealers; 5521 Motor Vehicle Dealers (Used Only); 5561 Recreational Vehicle Dealers; 5571 Motorcycle Dealers; 6719 Holding Companies, Not Elsewhere Classified; 7513 Truck Rental & Leasing without Drivers; 7514 Passenger Car Rental; 7515 Passenger Car Leasing; 7519 Utility Trailer & Recreational Vehicle Rental

Budget Group, Inc., is a holding company that, through subsidiary companies and their franchisees, operates Budget Car and Truck Rental, which in 1997 was the world’s third-largest automobile and truck rental system, operating in more than 120 countries. A subsidiary, Budget Car Sales, was one of the largest independent retailers of late model vehicles in the United States. Budget Group also was also operating parking facilities, leasing vans for pooling operations, and renting and selling recreational vehicles, including motor homes, truck campers, and motorcycles.

Private Budget Franchisee, 1987–93

Budget Group got its start as Team Rental Group, which was founded in 1987 by Sanford “Sandy” Miller. Miller entered the car rental business in 1976 as an Avis management trainee in Providence, Rhode Island. After two years, he and Jeffrey Congdon decided to buy Fordham Rent A Car, an independent, severely undercapitalized outlet in the Bronx. Miller got a quick education about doing business in the inner city when his first customer stole the car rented to him.

Miller and Congdon—who later served as chief financial officer of Team Rental, from 1991 to 1997—sold Fordham to Dollar Rent a Car and helped Dollar expand to New York’s airports. From there Miller moved on to run a Budget Rent a Car Corp. franchise in Florida and then to become regional field operation manager for the company in the Northeast. During 1980 and 1981, Miller and Congdon became executive officers and principal stockholders of corporations that owned and operated 30 Budget Rent a Car franchises which were sold to the company in 1989.

Miller and Congdon founded Team Rental Group in 1987 with the acquisition of a Budget Rent a Car franchise for the San Diego metropolitan area. Team Rental had operating revenues of $16.5 million in 1990 and lost $246,000 that year. In 1991 revenue fell to $15.1 million, and the company lost $1.3 million. Despite its slow start, Team Rental borrowed money in 1991 to acquire Budget rental franchises in Albany and Rochester, New York, and Richmond, Virginia. It was operating at 18 locations by the end of 1992. That year the company had net income of $558,000 on operating revenue of nearly $22 million. The next year it earned $428,000 on revenue of $22.3 million.

Headlong Expansion, 1994–96

In August 1994 Team Rental purchased foreclosed Budget rental operations in Cincinnati, Philadelphia, and Pittsburgh, paying for these acquisitions and refinanced vehicles by issuing $104 million in five-year notes and by going public, offering 3.3 million shares of common stock at $12 a share. Team Rental now was renting 7,400 cars, trucks, and passenger cars at 52 locations and believed itself to be the largest Budget franchise group in the United States in terms of payment of royalty fees. Team Rental added Fort Wayne, Indiana, to its operations in November 1994. That year its revenues reached $38.6 million, but it earned only $250,000 after taxes and interest payments.

At the end of 1994 about 90 percent of the vehicles in Team Rental’s fleet were subject to repurchase by automobile manufacturers under guaranteed buy-back programs. Although this greatly lessened the company’s risks, auto manufacturers were reducing the number of cars in repurchase programs and had trimmed or eliminated cash rebates and other financial incentives for these arrangements. Accordingly, Team Rental decided to go into the used car business, opening a San Diego lot in November 1994 and stocking the lot partly with retired Budget rental autos. By the end of March 1996 the company was selling cars at seven locations in five states. Congdon, Team Rental’s second-largest shareholder, was running the company’s used car business from offices in Indianapolis, where he made his home. Miller, the chairman and chief executive officer of the parent company, was running it from headquarters in Daytona Beach, Florida.

Team Rental’s main effort continued to be directed toward extending its rental operations by acquiring still more Budget franchises. In January 1995 it completed a deal for seven Budget rental locations in Dayton and Springfield, Ohio, and Richmond, Virginia. During the same month it added Charlotte, North Carolina, to its roster, and in March, Hartford, Connecticut. And in April 1995 Team Rental made its largest acquisition, purchasing BRAC-OPCO, Inc., for stock. This company was a wholly owned subsidiary of Budget Rent a Car of Southern California, with 49 locations, a fleet in excess of 5,500 cars and trucks, and annual revenue (in 1994) of about $65 million.

Team Rental had operating revenue of $149.7 million in 1995, of which vehicle sales, rather) than rentals, accounted for 28 percent. In expanding, it more than doubled its total debt, to $319 million and had net income or only $337,000 for the year after paying $14.5 million in interest. This did not keep Team Rental from completing its eighth acquisition since going public 19 months earlier, by purchasing Arizona Rent-A-Car Systems Inc. in March 1996. This Budget franchisee had 24 locations in the Phoenix area and annual revenues of about $60 million. By the end of March 1996 Team Rental had 157 Budget rental locations in 13 metropolitan areas, and its 14,259 vehicles made it Budget’s largest franchise in terms of fleet size as well as royalty fees.

Team Rental also expanded into a new area in February 1996, when it purchased VPSI, Inc., from Chrysler Corp. VPSI owned Van Pool Services, the market-share leader in van pooling, operating in 22 states with annual revenue of about $36 million. For 1996, Team Rental raised its revenues to $375.4 million, of which sales, rather than rentals, accounted for 38 percent. For the first time the company had significant net income—$4.5 million—although its long term debt rose to $454.1 million.

Budget and Cruise America Acquisitions, 1997

In a deal that one observer described as “the mouse swallowing the elephant,” Team Rental purchased Budget Rent a Car, the nation’s third-largest rental car firm, from its owner, Ford Motor Co., in January 1997 for about $1.95 billion in cash and stock. Budget, which also was selling used cars at 23 locations, had annual revenue of $1.5 billion but had lost more than $100 million in 1995 and was said to have been only marginally profitable in 1996. As part of the agreement, Team Rental agreed to continue featuring Ford vehicles in the Budget rental fleet. With the completion of the transaction, Team Rental owned 80 percent of Budget’s U.S. fleet, with the other 20 percent continuing to be owned by other franchisees. After completing the purchase, Team Rental renamed itself Budget Group.

Team Rental apparently outbid larger rivals HFS Inc. (owner of Avis) and Republic Industries Inc. (owner of National Car Rental and Alamo) to acquire Budget Rent a Car, even thought it had no available cash. An innovative financial package organized by Credit Suisse First Boston (CSFB) involved more than 40 lawyers and bankers, representing Team Rental, CSFB, and five law firms. A CSFB banker recalled, “We took an entire floor of a New York law firm and closed everything in four hours. When you have enough people scared of the consequences of failure, it’s amazing what can happen.”

This blockbuster purchase did nothing to dull Budget Group’s voracious appetite for still more acquisitions in the motor-vehicle field. In July 1997 the company purchased Premier Car Rental LLC, which was serving the insurance replacement market through a network of 150 locations in 17 major U.S. markets. Three months later it announced plans to acquire Cruise America Inc., a dealer of recreational vehicles with annual sales of $95.6 million in fiscal 1997. Based in Mesa, Arizona, Cruise America had a network of 91 locations and a fleet of more than 4,300 recreational vehicles, including motor homes, vans, campers, and motorcycles.

In making the announcement, Scott White, a Budget Group vice-president, declared, “Our strategy is to be a company that owns these kinds of automotive services that have operating synergies between them. The common theme between the companies is we borrow money more cheaply so we can finance our fleets more cheaply. . . . We want to leverage this fixed asset base and acquire companies like Cruise America where we can take our costs in the back office and behind the scenes and grow revenues through cross marketing.” The Cruise America acquisition was completed in January 1998 for $61 million in stock and the assumption of $76 million in debt.

Company Perspectives:

Management’s long term strategy is to create a network of transportation-related companies, which leverage the asset base and expertise of Budget Group. Budget Group’s assets include a trade name recognized around the world, locations for the rental, sale and maintenance of vehicles; a workforce that is proficient in acquiring, financing, monitoring, maintaining and selling vehicles; and advanced information systems to support these operations. Increasing the utilization of these assets by acquiring related businesses delivers economies of scale and increases profitability.

Ryder Acquisition, 1998

Budget Group went a step further in March 1998 when it purchased Denver-based Ryder TRS Inc. from Questor Partners L.P. for $706 million in cash, stock, and other considerations, a sum that included assumption of $441 million of debt. Ryder, the second-largest company in the drive-it-yourself truck rental field, had 4,200 locations worldwide, a fleet of 30,500 vehicles and annual revenue of about $550 million. Miller said Budget and Cruise America’s truck rental operations would be consolidated with Ryder in Denver. With the acquisition, about 40 percent of Budget Group’s revenues were expected to come from truck rentals, which an analyst said were yielding higher profit margins than car rentals.

The acquisition of Budget Rent a Car and other companies enabled Budget Group’s revenues to reach $1.3 billion in 1997. Its net income rose to $36.9 million. Investors applauded these results, bidding the company’s stock as high as $39.50 a share in early 1998. Of the company’s 1997 income, vehicle rentals accounted for 78 percent and car sales for 18 percent. Company debt came to $2.6 billion at the end of the year.

Budget Group’s Budget Car and Truck Rental system had more than 3,200 locations in 1997 and a peak fleet size during the year of 283,000 cars, 22,500 trucks, and 5,100 pick-ups. Of the 964 Budget System (which included car-sales lots) locations in the United States, 509 were owned by Budget Group and the others by franchisees. Of the 2,242 locations in other countries, only 71 were owned by the company. Budget Car Sales was operating 26 retail car-sales facilities. Cruise America was renting and selling recreational vehicles at 92 North American locations. Premier Car Rental had a network of 150 locations in 16 major U.S. markets. Van Pool Services was leasing vans for pooling operations in 28 cities in 18 states and the District of Columbia. Budget Airport Parking was operating airport parking facilities at certain locations.

Miller, Congdon, and John P. Kennedy, who was the company’s president and chief operating officer from August 1994 to May 1997, held, combined, about 8 percent of the company’s Class A shares of common stock in February 1998. In addition, they held all of the company’s Class B shares, giving them 48 percent of the voting power.