A red herring from Hertz

Here’s a question that must be keeping the folks at Clayton, Dubilier & Rice, Carlyle Group, and Merrill Lynch Global Private Equity (plus half the underwriting department at Goldman, Sachs & Co.) awake at night: is anyone besides Avery Johnson paying attention to the Hertz initial public offering?

Well, yeah. Kinda.

BusinessWeek basically called the IPO a dog last week. “Will the Hertz deal be good for public investors?” it asked. “If other recent IPOs are any indication, the answer is a resounding no.”

Business Travel News — which isn’t exactly required reading on Wall Street — raised a red flag when it noted that Hertz’s supply agreement with Ford expires in 2010, and that the company isn’t sure whether it will be able to extend that agreement.

But what does this IPO say about customer service?

Hertz is in a mandatory quiet period required by the Securities and Exchange Commission. But its Form S-1 registration statement, which is also called a “red herring” on the Street, is hardly silent on the issue.

Scroll on down to page 18 (Risk Factors) for some enlightening reading.

Hertz says its optional liability insurance policies enjoy certain “exemptions under state laws” and that if they were to change (as they have in other countries) it would lead to a “reduction in revenues.”

So, what they seem to be saying, basically, is that if state governments begin treating Hertz insurance as if it were insurance then the company would lose money on it.

What does that say about the effectiveness of Hertz’ (or any other car rental company’s) insurance?

Perhaps the most revealing part of the Hertz filing relates to surcharges. It notes that several state attorney generals have stopped car rental companies from adding surcharges to their bills for items such as vehicle licensing costs and airport concession fees. Last year, Hertz collected $287.4 million in these so-called car rental expense pass-throughs.

If more states prevented Hertz and other car rental firms from imposing these surcharges, it would have “a material adverse impact on our revenues and results of operations,” according to the Hertz filing.

Why would a car rental company lose money if the price it quoted included all of these fees?

Unless … it doesn’t. In that case, you have a car rental company quoting an artificially low price and then broadsiding customers with “nonnegotiable” fees.

We also know from the filing that customers are not happy with some of the surcharges. Not happy at all.

On page 107 of the prospectus, for those of you following along, Hertz says it is being taken to court in Texas for its fuel and service charges. The case, Jose M. Gomez, individually and on behalf of all other similarly situated persons, v. The Hertz Corporation seeks compensatory damages, with the return of all surcharges paid or the difference between the charges and our actual costs, disgorgement of unearned profits, attorneys’ fees and costs. It is not the only case of its kind.

Don’t get me wrong — I’ve always felt that Hertz is a class act. And I feel that it still is. But as a customer advocate, I am troubled by some of the things that I read in its prospectus.

I can’t wait to read the S-1 for Avis and Budget. Or, if it ever happens, Enterprise.

Christopher Elliott is the author of Scammed: How to Save Your Money and Find Better Service in a World of Schemes, Swindles, and Shady Deals. Critics have called it “eye-opening” and “inspiring” — it’ll “grab your attention and won’t let go.” Order your copy now on Amazon, Barnes & Noble or iTunes.

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