Avis Europe sales drive pays off as punters pile in; The Investment Column

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The Independent Online
Investors hoping for a piece of the pounds 237m Avis Europe offer for sale have until Friday to get their applications in, but judging by demand to date they may be lucky to get a decent-sized allocation. The institutional and international placing of the car rental group is looking well covered even before the retail offer gets into its stride. With registrations for the prospectus from small investors running above 100,000, it looks inevitable that applications will be scaled down.

The only consolation for investors is that even if the pounds 1,000 minimum allocation is scaled back, they will still gain access to the Founders' Club, giving them up to four days' free car rental worth pounds 85 if they hold onto their shares until 3 July. With some contortion of the usual rules of investment, advisers argue that the perks raise the notional yield on the shares from 3.2 per cent to 11.5 per cent, assuming the price is fixed at the 117p mid-price of the indicated range.

The big question is whether Avis is worth all the fuss, even if it is Europe's biggest rental group. The few in the City not involved in the sale have questioned why it requires five investment banks led by Merrill Lynch and NatWest Securities and an international marketing effort to get such a relatively small offer away. Presumably Avis is keen not to repeat its previous experience of the stock market: when it floated in 1986, two-thirds of the offer was left with the underwriters and the price went to an immediate discount in first dealings.

There is no doubt the business has its risks. Operating profits halved to under pounds 40m in 1993/94 after Avis got hit by a triple whammy. The recession came late to the car rental industry and in that year all the European economies turned down at once.

Then the group was hammered by an interruption of car supplies from "a long-term partner" in Germany, and lastly a little-known side-effect of the collapse of the Berlin Wall was a huge upsurge in car theft in the West, resulting in the mainly uninsured Avis losing around 1,000 cars a year at one stage.

There is no doubt this is a strong business, generating compound annual profits growth of over 12 per cent over the past 16 years. But within that, there can be big swings linked to economic growth rates, while the industry is highly competitive, with Hertz also coming to the market and Europcar rumoured to be on the way. The lessons of three years ago also highlight the importance of special sales deals on cars to the equation.

Even so, based on SBC Warburg's forecast of profits rising from a pro forma pounds 68m to pounds 77m in the current year, the shares at 117p would trade on a lowly forward multiple of 12. Attractive.