It did not take long after Stephen Scherr stepped down as Goldman Sachs’ chief financial officer in late 2021 for him to start spending more time in Florida. But he was not retiring to play golf. Rather, in February 2022 he was named chief executive of Hertz, the Fort Myers-based mainstay of the rental car business which had just emerged from bankruptcy and looked poised to take advantage of a post-pandemic “revenge travel” boom. Hertz’s majority owners, two little-known private equity firms called Knighthead Capital and Certares, had made two bold bets after their $2bn equity investment won the auction to bring Hertz out of bankruptcy earlier that year. First, they decided that the century-old company would reposition itself as a forward-looking “mobility” group that would stand out in a crowded field with a fleet heavy on Tesla’s electric vehicles. Second, they determined that a Wall Street investment banker was the person to lead that transformation. The PE firms offered Scherr 2 per cent of Hertz’s equity if he could help it reach lofty stock market targets. Hitting the final incentive — a little more than doubling Hertz’s share price over five years — would have unlocked stock worth at least $498mn. But on Friday, after just 25 months in the job, Hertz abruptly announced that Scherr would be leaving at the end of the month. Gil West, a former chief operating officer of Delta Air Lines and General Motors’ Cruise self-driving car unit, will be replacing him. Instead of enjoying a boom, Hertz is in trouble again. Its shares have fallen 60 per cent from the day Scherr joined, pulled down by the failure of its pivot to EVs. The situation came to a head in January when it shocked investors with the news that it had decided to sell a third of its EVs, taking a hit of $245mn. Scherr and the board had discussions then about what management skills were needed for the next phase at the company. Around the same time, people familiar with the matter say, he confessed to friends that it might be time for him to leave, given the need for a tighter focus on operations. Hertz’s struggles have underscored that US consumers are proving more wary of EVs than expected and that even small strategic errors at companies with complex supply chains and capital structures can quickly snowball. “Given the stock price and the moves made operationally, things weren’t going well,” said one person involved. Hertz needed someone to “stabilise the business” before focusing on new initiatives, they added. A person familiar with the thinking of Knighthead and Certares said that the pair agreed that it was the right time for a new CEO. Others deeply involved in the Hertz investment have also moved on. Jeff Nedelman, a Certares managing director who had worked closely with Scherr at Goldman and recruited him to Hertz, resigned from the rental company’s board in January after taking a job at Carlyle. It is a very different picture from the one Hertz’s owners were looking at before they hired Scherr. Within months of buying Hertz out of bankruptcy, Knighthead and Certares had relisted the company on Nasdaq in November 2021 and were already sitting on $3bn of paper and cash gains from their $2bn outlay. The two firms had developed a thesis that travel would bounce back sharply after the global lockdowns with beaten-down travel and hospitality companies benefiting the most. Moreover, financial and operating factors that had pushed Hertz into bankruptcy reversed in the 2021 rally: its balance sheet had been cleaned up and the prices of used cars surged, letting it boost profits while modernising its fleet. In October 2021, before Scherr’s arrival, Hertz had trumpeted “an initial order” of 100,000 Teslas, saying that consumer interest in EVs was “skyrocket[ing]” and hiring the former New England Patriots quarterback Tom Brady to pitch how it was “changing the game”. Its private equity owners preached that Hertz’s investment in EVs and their related charging infrastructure would be revolutionary, even entailing autonomous vehicles down the road.
“This should be one of the best ESG investments in the market today,” said Greg O’Hara of Certares at the time, hailing the environmental benefits of EVs. Executives from Certares and Knighthead had known Scherr for years. “We’ve got your next gig,” they told him when they approached him about the Hertz job in late 2021 shortly after he announced he was leaving Goldman. At first, Scherr was sceptical. But the closer he looked, the more he shared their enthusiasm. He even drew parallels between managing hundreds of thousands of rental cars and the risk management skills he had honed during almost three decades at Goldman. At an investor event in June 2022, Scherr told the audience that corporate customers would rent EVs to achieve their “net zero” emissions-cutting objectives and ride share drivers would prefer EVs to avoid high petrol prices. His contacts proved useful too as Hertz struck high-profile partnerships with various Big Tech powerhouses. But through 2022 and early 2023, travel and leisure stocks stagnated as the revenue gains from resurgent travel were already priced in. To make matters worse, in October 2023, Hertz shocked Wall Street by disclosing that the EVs it had rented to Uber drivers were being damaged at an unexpectedly high rate. Not only were they proving costly to repair relative to traditional internal combustion engine cars, but their salvage values had suffered during a Tesla-induced price war. Many renters, meanwhile, still preferred traditional cars and hybrids, leaving Hertz car lots full with Teslas even after it offered drivers heavy discounts. By January, Scherr had to tell the market that Hertz would cut a third of its EV fleet. Its earnings before interest, taxes, depreciation and amortisation for 2023 fell to $561mn — down 75 per cent year-over-year, even as revenues remained resilient. “Steve is a super smart guy with a great pedigree. But he was a numbers guy not an EV or turnaround expert,” said Ian Zaffino, an equity research analyst at Oppenheimer. “It’s hard to be a long tenured CEO with all these curveballs thrown at you.” Stephen Scherr told colleagues he remained optimistic about Hertz’s prospects, even as he said 2024 would be a ‘transitional’ year © Christopher Goodney/Bloomberg “If you look at the top line of the company on a revenue basis, [Hertz] is performing well but on a cost basis it is underperforming,” said one person close to the group. They added that Hertz would have to cut costs aggressively. “[They] are not abandoning the EV strategy, just downsizing it until the business is profitable,” they said. The EV fiasco has left Hertz in a precarious position. It carries more than $3bn in corporate debt, compared to adjusted ebitda of less than $600mn last year. Since emerging from bankruptcy, it has used cash flow and debt issuance to buy back $3bn in common stock as well as redeem almost $2bn of preferred stock held by Apollo Global Management at a 25 per cent premium to Apollo’s purchase price. In a 2021 follow-on equity offering, Knighthead and Certares sold $500mn of shares. But the value of their remaining majority stake is today worth $1.4bn, leaving them underwater on their initial $2bn investment. On Tuesday, in a memo seen by the Financial Times, Scherr told colleagues he remained optimistic about Hertz’s prospects, even as he said 2024 would be a “transitional” year. It had partnerships with Google on artificial intelligence, Apple and Stripe on digital payments and Palantir on “fleet control”, he noted, predicting that its investments in technology would create “long-term value” for the business. According to FT calculations based on Hertz securities filings, Scherr will create less value for himself than once seemed possible. He will collect only 2.8mn of the 12.5mn shares he stood to earn when he joined had he hit the targets set for him — worth just over $20mn, rather than the near-$500mn he could once have aimed for. He will have separately taken home less than $10mn in cash pay for his 25-months at the wheel. Scherr will, however, keep one fringe benefit. The company’s last proxy filing states that he remains eligible for free Hertz car rentals for the rest of his life.
Fuente de nota e imagen: https://www.ft.com/content/d7980487-7573-4b83-b4c2-218eb12a4f1a?accessToken=zwAGFB2nX-4okdPXmASHdXNLg9O0wiGOsSpPGg.MEUCIHV9gj3vyy_eNQ9BhuD_Y4UfNRiyQOjyYwFe77S6l8jfAiEAuTRbzvUIw_7naE1ZdopmtNWNG6yP6D8z74e1mNYele8&sharetype=gift&token=9ee5776a-d563-489d-8f47-a2851e404d93