Recently Hertz Global Holdings (OTCMKTS:HTZGQ) sold one of its subsidiaries to a private equity firm for $825 million. But don’t be lured into thinking this will be enough to get Hertz out of bankruptcy. The truth is Hertz stock is completely worthless. It has been rising lately and this might lure some into believing it has some value.
The truth is that there is no fundamental reason to believe that Hertz stock is anything but worthless. I tried to make that clear in my last article on the company on Nov. 6. But maybe I can help investors see it even better now.
Why Hertz Is Worthless
Keep in mind that Hertz is only in Chapter 11 restructuring. It has $18.4 billion in debt, at least, based on its balance sheet filed on Nov. 9, for the quarter ending Sept. 30.
But its shareholders’ equity was just $341 million, based on page 2 of its 10-Q. This was down from $559 million in the prior quarter.
However, the company has just $1.1 billion to pay the ongoing costs of the $18.4 billion in liabilities. Moreover, it also has $4 billion in intangible assets and goodwill on its balance sheet.
That means that shareholders’ equity is effectively negative $3.659 billion after deducting the goodwill and intangible assets.
In other words, Hertz stock is probably worthless. This is because it is very rare for a company with negative equity, and in bankruptcy, to turn around.
For example, typically the owners of such a company will want to own all the equity after the restructuring negotiations are finished. There is simply no reason to give up any of the new common stock equity to the prior owners of common stock shares.
From what I understand reading through Hertz’s filings, Apollo Group is in charge of the debtor’s side of the negotiations. They are a cutthroat private equity fund. They will likely see no value in allowing existing common stockholders to own shares in the restructured company.
Don’t forget that the company now is in debtor-in-possession financing of its operations. This means that the additional financing the company now has to run its operations brings it certain benefits.
The chief benefit is that this gives it full collateral over all of the company’s assets. This is another reason why there is likely no value left in Hertz stock.
What to Do Next With Hertz Stock
Hertz stock trades only over-the-counter. It was kicked off the NYSE. The company is also not interested in making sure that the stock trades higher.
For example, management is concerned only about one thing now. Getting out of bankruptcy with the least disruption to its business. The fate of common stock owners is no longer high, if at all, on its list of management concerns.
Moreover, keep in mind that although you might see Hertz rising it could easily keep rising right up until the point where it no longer trades.
In other words, the ability of Hertz stock owners to self-delude and to encourage others in that thinking is unlimited.
Another point to take into consideration is that I don’t see the company coming out of Chapter 11 until at least the end of February. The reason is that the company still has a meeting scheduled with creditors for Feb. 16. This can be seen on the Hertz restructuring website.
There is only the slightest chance that the debtors will agree to give shareholders a stake in the company after it exits bankruptcy. That chance is probably significantly less than 10%, and probably close to less than 1%.
Therefore, it seems that buying Hertz stock will be a speculative bet at best. There is no fundamental logic in buying it other than just pure gambling, or a belief in luck.
On the date of publication, Mark R. Hake did not have (either directly or indirectly) any positions in any of the securities mentioned in this article.
Mark Hake runs the Total Yield Value Guide which you can review here.