Friday, May 14, 2021


Wall Street Bets was right: Hertz's bankruptcy auction will actually give shareholders a handsome payout - even after Wall Street decided the stock was worthless

egraffeo@businessinsider.com (Emily Graffeo) 



Retail traders helped spur a nearly 825% spike in Hertz last summer after it filed for bankruptcy.

They bought the stock even as Hertz said its shares could be "worthless."

Shareholders will receive a payout in Hertz's takeover bid, vindicating retail traders' instincts.

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Long before GameStop and Reddit's Wall Street Bets became synonymous, the social-media platform was enamored of another stock: Hertz.



The car-rental company became the target of Reddit-fueled traders last summer when it announced it would file for bankruptcy. Shares of Hertz spiked as much as 825% in a matter of weeks. Wall Street onlookers were scratching their heads, wondering why retail investors were scooping up shares of a company that couldn't meet its debt obligations.

In June, retail investors who steadfastly believed that "stonks only go up" were especially excited that the billionaire investor Carl Icahn missed out on Hertz's massive rally. Icahn had sold his Hertz position at an average price of $0.72, representing a loss of more than $1.8 billion.

"Good job guys. Hertz is now a viable company again. Carl Icahn is a clown who bought high, sold low," a Wall Street Bets user commented last summer.

Even Hertz itself didn't have as much faith in its stock as the retail traders did. When the company issued more shares in June, it said its stock could be "worthless."

"We are in the process of a reorganization under chapter 11 of title 11, or Chapter 11, of the United States Code, or Bankruptcy Code, which has caused and may continue to cause our common stock to decrease in value, or may render our common stock worthless. Investing in our common stock involves a high degree of risk," the company said in a filing with the Securities and Exchange Commission.

Typically, in a corporate bankruptcy case like Hertz's, equity shareholders would receive nothing. In March, Hertz unveiled its reorganization plan, which said shareholders would receive no payout.

But on Wednesday, Hertz announced that it had accepted a $6 billion bid from a group of investors - Knighthead Capital Management, Certares Opportunities, and Apollo Capital Management - to exit bankruptcy. Knighthead's plan values Hertz at about $7.4 billion including debt, according to Bloomberg. The winning bid would pay shareholders close to $8 a share.

As part of the Hertz proposal, institutional and accredited equity investors would be given about $240 million in cash and the chance to participate in either a $1.6 billion rights offering or warrants for about 20% of the reorganized company, Bloomberg reported.

Many of the traders who speculated on Reddit likely won't qualify as institutional or accredited investors and therefore won't get new shares. But their instinct about the value of Hertz's stock turned out to be correct, even when much of Wall Street didn't believe so.

The $8 share price is higher than what any retail investor who purchased last summer paid.

Andrew Glenn, a managing partner of Glenn Agre Bergman & Fuentes who orchestrated the winning bid, told Insider the equity payout to shareholders was "unprecedented."

"Just six weeks ago, shareholders were going to get nothing, and now they're getting upwards of $8 a share," Glenn said. "That doesn't happen every day in bankruptcy. In fact, I've never seen it happen."

He added that a confluence of events had led to the success for the equity shareholders and Hertz's valuation: the V-shaped recovery, pent-up demand for travel, and a shortage of rental cars as many companies sent their cars to the used-car market during the pandemic.

"It's just a perfect storm that happened first gradually and then very quickly over the first quarter of this year and really the last two months," he said. "Our clients saw that trend happening before it unfolded, they had conviction as to the valuation, and they entered into the bankruptcy and became the mouthpiece in court for the Knighthead proposal."

Shares of Hertz extended their gains for the second day in a row on Thursday, jumping as much as 11%, to $6.36. That followed a nearly 70% surge on Wednesday.
Read the original article on Business Insider

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