The Hertz LBO: How CD&R, Carlyle and Merrill Lynch Exited Cleanly — Seven Years Before Chapter 11

Two things are true about Hertz that are hard to hold in your head at the same time.

The first is that Clayton, Dubilier & Rice, The Carlyle Group, and Merrill Lynch Global Private Equity fully exited their Hertz investment in May 2013 — roughly seven and a half years after taking the rental-car company private from Ford Motor Company for a $15 billion enterprise value. By the time the last block traded through Goldman and JPMorgan, the three sponsors had returned their $2.295 billion equity check and then some, per public filings and press reports.

The second is that on May 22, 2020 — seven years after that final block — Hertz Global Holdings filed for Chapter 11 in the U.S. Bankruptcy Court for the District of Delaware with roughly $19 billion of total funded debt against roughly $1 billion of cash. The pandemic collapse of travel had cratered rental demand by ~80% in eight weeks, and the corporate balance sheet couldn't service it.

Same company. The sponsors made their money and moved on. The public shareholders — and the creditors under them — did not.

This is worth thinking about carefully, because the popular framing that "a levered LBO killed Hertz" is not quite what happened. What happened is that a sponsor group timed an entry, monetized aggressively, exited cleanly, and left a levered public-company balance sheet behind them. The fund's outcome and the company's outcome are two different questions, and mistaking them for the same one is how junior associates get returns math wrong.

The 2005 entry — the second-largest LBO in history at the time

Ford Motor Company had owned Hertz outright since 1994 and, by 2005, needed cash to fund its own automotive restructuring. In September 2005 Ford put Hertz up for sale; the CD&R-led consortium won the auction on September 12, 2005 and closed the transaction on December 21, 2005.

The deal was structured as a $15.0 billion enterprise value transaction. Ford Holdings — the subsidiary through which Ford owned Hertz — received $4,379 million in cash consideration; $10,116 million of existing Hertz debt was refinanced or assumed. At the time it was the second-largest LBO in history, trailing only KKR–RJR Nabisco in 1988.

The capital structure had two very distinct pieces, which matters more than it usually does:

The corporate debt stack was itself several tranches:

That corporate/fleet split is the key structural feature. In a normal LBO, all debt sits at the operating company, and a downturn in cash flow pressures the whole stack simultaneously. In Hertz, the ~$7.1 billion of vehicle-backed ABS financing was secured against the rental cars themselves and structurally isolated from the corporate credits — the fleet debt lenders had claims on cars, not on Hertz Global. That distinction became decisive fifteen years later; hold it in mind.

The dividend recap that made the sponsors halfway whole before the IPO

Six months after the LBO closed — not six years, six months — Hertz executed one of the most aggressive early-hold monetizations of the 2005–2007 mega-buyout era.

In June 2006, Hertz used a new $1.0 billion loan plus cash on hand to pay a $999.2 million special dividend to its stockholders. There was one stockholder: the sponsor consortium. Post-IPO, the sponsors received an additional ~$425.5 million in one-time dividends per the S-1 registration statement. Combined, the sponsors had extracted approximately $1,424.7 million in cash distributions against a $2,295 million equity check — before public shareholders had bought a single share.

If you want a template for how dividend recaps distort near-term IRR, this is the one to model. Every dollar returned in month six of a hold pulls the whole IRR curve forward. Ignore whether it changed the eventual MOIC by very much; the point is that fund-level DPI (distributions to paid-in) reached above 60% by IPO date. That's a meaningful marker for LPs even if the ultimate exit multiple is average.

For the mechanics of how S&U changes when you layer a dividend recap on top of the original financing structure — new debt raised solely to fund a distribution back to the equity — see sources & uses for an LBO. The Hertz June 2006 recap is a textbook case of using additional borrowing capacity to accelerate sponsor returns without altering the operating capital structure of the business.

The rushed IPO

Hertz Global Holdings priced its IPO on November 16, 2006 — eleven months after the LBO closed. The offer was cut to $15.00 per share from an initial $16–$18 filing range on weaker-than-expected demand. 88,235,000 shares raised roughly $1.32 billion in gross proceeds, most of which went to repay debt (including the loan that had funded the June 2006 dividend recap), not to the sponsors directly.

The public-market read on the deal was skeptical. Bloomberg's coverage that day headlined "Hertz IPO Starts in Low Gear." The compressed 11-month timeline plus the dividend recap in between drew heavy criticism as one of the most brazen quick-flip patterns of the era.

But — and this matters — the sponsors did not sell any material amount of stock at IPO. They still owned the vast majority of the company. What they had done was set up a public market for the shares. The actual exit was still seven years away.

The 2013 exit — two secondary offerings, then done

The sponsors finally exited in two big secondary offerings, both in 2013, essentially back-to-back.

Two structural notes on the March offering. First, Hertz itself repurchased 23,200,000 of the 60,050,777 shares from the underwriters at the same $20.14 — the company was a buyer of its own stock alongside the sponsor sell-down, which is a way to hand cash to the exiting sponsors without pushing the whole block onto the public tape at once. Second, the March/May execution windows were only about six weeks apart, which is very fast for two blocks of that size. The sponsors clearly decided the exit window was now.

According to PE Hub's May 2013 reporting, CD&R, Carlyle, and BAML "recouped $2.3 billion and then some" on the deal. Combined with the ~$1.4 billion of pre-exit dividends, aggregate distributions to the sponsors substantially exceeded the $2.295 billion equity check. Exact MOIC and IRR figures aren't fully broken out across every dividend path and every sell-down in the public filings, but the deal was widely characterized in the trade press as a respectable win — solid, not heroic — given a 2005 vintage that had to survive the 2008–2009 financial crisis.

For a deeper walk through why "solid MOIC over a long hold" often produces mediocre IRR — and why sponsors will sometimes accept that trade — see MOIC vs IRR. If you want to reverse-engineer what a specific exit price implies for MOIC and IRR under a chosen entry equity check and hold period, the free LBO returns calculator will run the debt-paydown loop and surface both metrics live.

What happened next — after the sponsors were gone

This is where the two-things-can-be-true structure of the case study gets sharpest.

CD&R, Carlyle, and BAML had installed Mark Frissora as CEO shortly after the LBO close. Frissora ran the company through the IPO, the crisis, the sponsor exit, and until September 2014 — when he departed amid an accounting restatement covering 2011–2014 that eventually adjusted roughly $235 million of prior-period results. That happened after the sponsors were out. From a fund perspective, it was somebody else's problem.

Then, in the late 2010s, Carl Icahn built a 39% stake in Hertz. He was betting on operational turnaround. When the pandemic hit in March 2020, rental demand collapsed by roughly 80% in eight weeks. Hertz filed voluntary Chapter 11 petitions in the U.S. Bankruptcy Court for the District of Delaware on May 22, 2020 with approximately $19 billion of total funded debt and roughly $1 billion of cash. Icahn sold his entire 39% stake at approximately $0.72 per share around the filing, taking an approximately $2 billion realized loss on the assumption that equity would be wiped in the reorganization.

Two structural features of the filing are worth noting because they matter for anyone modeling a similar situation.

First, the corporate/fleet split from 2005 mattered enormously in 2020. Approximately $14.4 billion of vehicle-backed bonds sat at non-debtor subsidiaries and were excluded from the Chapter 11 filing entirely. The rental fleet continued operating throughout the reorganization because those creditors had claims on cars, not on the corporate parent. This is exactly the argument for structuring an asset-heavy LBO with separate corporate and asset-backed layers; the debt capacity calculator will show you how much incremental leverage a business can support when the securable-asset base is treated as a separate financing pool rather than aggregated into a single corporate-credit stack.

Second, Icahn was wrong. A used-car price spike (the semiconductor shortage was pushing new-vehicle production down and used-vehicle values up), a faster-than-expected travel rebound, and a bidding war between competing reorganization plans meant that by the time the Plan of Reorganization was confirmed on June 10, 2021 and became effective June 30, 2021 — funded by Knighthead Capital Management, Certares Opportunities, and Apollo Capital Management funds injecting $5.9 billion of new equity capital — creditors were paid in full and existing shareholders received over $1 billion of recovery value. This is a rare Chapter 11 outcome and, in Icahn's case, a very expensive one.

The practical takeaway

The Hertz LBO teaches three things worth carrying into your next deal review:

1. Sponsor return ≠ business outcome. CD&R, Carlyle, and MLGPE closed and returned their fund positions in May 2013. Hertz filed Chapter 11 in May 2020. Both statements are true. Neither one refutes the other. When you're modeling an LBO, be precise about which perspective you're solving for — fund-level IRR to LPs, or long-term capital structure resilience of the operating company. They generate different answers.

2. Aggressive early-hold monetization changes what "success" means. By pulling $999.2 million out six months after close and another $425.5 million around the IPO, the sponsors had de-risked more than 60% of their equity before public shareholders bought a share. That materially changes what the eventual exit multiple has to do to produce an acceptable fund outcome. A 1.6x MOIC over 7.4 years looks mediocre in isolation; the same 1.6x with two-thirds of equity already returned in year one plays quite differently in fund reporting.

3. Structural separation of corporate and asset debt is a survival mechanism for cyclical businesses. The Hertz corporate stack couldn't survive 2020. The Hertz rental fleet — funded through a structurally isolated ABS layer against the cars themselves — did. That distinction is not decoration. It is exactly the kind of capital-structure engineering that lets asset-heavy LBOs survive downturns that would kill a single-credit structure.

If you want to see all three of these dynamics in one worked model — a full corporate LBO with an ABS layer against a specific asset class, S&U with a dividend-recap layer, and returns math that separates dividend-recap DPI from exit MOIC — our All-in-One PE Model has the tranche flexibility and staged-return mechanics to model exactly this kind of transaction. See the sheet preview before buying.

Hertz is one of the few LBOs in PE history where the answer to "did the deal work?" depends entirely on who's asking.

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Sources:

1. Hertz Global Holdings, Inc. Form S-1/A (2006 IPO Registration), SEC EDGAR — sponsor equity, dividend recap, LBO financing detail
2. The Hertz Corporation Form 10-K (FY2005), SEC EDGAR — LBO closing capital structure
3. Hertz Global Holdings Form 424B4 — IPO Prospectus (November 2006), SEC EDGAR — IPO price, shares offered
4. Hertz Global Holdings Form 8-K (March 2013) — 60.05M-share secondary offering, SEC EDGAR — March 2013 sell-down price and share count
5. Hertz Global Holdings Form 10-K (FY2013) — sponsor sell-down detail, SEC EDGAR
6. Hertz Announces Sale of 49,800,405 Shares of Common Stock by Selling Stockholders (Hertz press release, May 2013), Hertz Newsroom — May 2013 exit tranche
7. Hertz Global Holdings Form 8-K (May 2020) — Chapter 11 filing, SEC EDGAR — filing detail
8. Hertz Global Holdings Form 10-K (FY2020) — bankruptcy debt detail, SEC EDGAR
9. Hertz Selects $6 Billion Bid From Knighthead, Certares and Apollo to Fund Chapter 11 Exit (Hertz press release, May 2021), Hertz Newsroom — plan sponsor group and terms
10. Hertz Global Holdings Form 8-K (June 2021) — Plan of Reorganization confirmed, SEC EDGAR
11. Hertz So Good: CD&R, Carlyle and BofA Recoup $2.3 Bln Investment and Then Some, PE Hub — sponsor exit aggregate recoup figure
12. Hertz IPO Starts in Low Gear, Bloomberg — IPO market reception
13. Clayton, Dubilier & Rice, The Carlyle Group and Merrill Lynch Global Private Equity Complete $15 Billion Hertz Acquisition, Carlyle — deal close announcement
14. The Hertz Maneuver (and the Limits of Bankruptcy Law), University of Chicago Law Review — Chapter 11 shareholder-recovery mechanism analysis
15. Rental Car Intermediate Holdings, LLC — Kroll Restructuring Docket, Kroll — bankruptcy filings docket