2014-15 Annual Review

Premier global brands, market position, and investment drive growth; cost efficiencies enhance earnings and fund strategic initiatives; and strong cash flow utilized to deleverage

After carving Hertz out of the Ford Motor Company (“Ford”) in 2005, CD&R helped guide the improved operating profile of the business in terms of profitability, expanded service offerings and geographic reach, taken the business public and fully realized the Firm’s original and follow-on investments.

Through a series of dividends, a secondary offering and four block trades, CD&R Fund VII fully realized the Hertz investment, generating 2.6x capital invested and a 33% gross IRR.

Company Profile

The Hertz Corporation is comprised of two primary businesses: Hertz Rent-A-Car (RAC) and Hertz Equipment Rental Corp. (HERC). Hertz has been in the car rental business since 1918. Combined with the Dollar and Thrifty brands, RAC operates from approximately 10,300 owned and licensed locations in approximately 150 countries worldwide. Hertz is recognized as the customer-service leader in the rental-car industry and has particularly strong positions in the high-margin corporate and leisure sectors, where service is most highly valued. Hertz has been in the equipment rental business since 1965. HERC is one of the largest equipment rental businesses in North America (based on revenues) and operates approximately 340 branches worldwide. Hertz has approximately 38,300 full-time employees worldwide and approximately $10 billion of annual revenue pro forma for the acquisition of Dollar Thrifty.

Long-Term Sourcing

CD&R first approached Ford about Hertz three years prior to Fund VII’s 2005 investment. Over that period, the Firm formed a differentiated view of what was possible in terms of financing the transaction and identified key areas of business performance improvement. The long-term sourcing effort ultimately positioned CD&R and its partners to successfully acquire the business. In December 2005, CD&R partnered with The Carlyle Group and Merrill Lynch Global Private Equity to acquire Hertz from Ford for $14.8 billion. At closing, CD&R Fund VII and CD&R-managed LP co-investment vehicles invested a total of $775 million in the transaction, including $497 million from Fund VII, for a 34% equity stake in the company. CD&R led the transaction, and former CD&R Operating Partner George Tamke helped lead the company’s operational transformation first from his role as Chairman, and now as Lead Director of the board. In July 2009, CD&R Fund VII invested an additional $197 million in Hertz shares at a price of $6.23 per share.

Value Building Strategy

The acquisition of Hertz represented a classic CD&R investment as a complex carve-out of an undermanaged, non-core subsidiary with market-leading positions and significant room for operational improvement. CD&R’s considerable

experience with complex, multi-location business models proved critical as Hertz aggressively leveraged its brand and market leadership positions. Under CD&R’s ownership,

EBITDA margins in the company’s RAC business expanded at almost twice the rate of its closest competitor, Avis-Budget Group.

Through a series of dividends, a secondary offering and four block sales, CD&R Fund VII’s investment generated total proceeds of $1.6 billion, representing a $1.0 billion gain for CD&R Fund VII, a gross of 2.6x capital invested and a gross IRR of 33%.

CD&R worked closely with Hertz management to drive a number of operating improvement and revenue growth opportunities, categorized into five broadly defined initiatives:

• Business productivity. Continued emphasis was placed on increasing employee and process productivity to improve throughput and enhance overall efficiency. The company delayered

• and consolidated regional management and drove efficiency through the integration of various back office and support operations.
• Customer service. Hertz focused on initiatives to drive customer service levels to all-time highs, implementing a series of service and technology offerings to widen the differentiation gap versus

• its competitors. The company’s worldwide RAC Net Promoter Score was up 6.4% in 2011.
• Fleet management improvements. Hertz improved utilization management by right-sizing the fleet to match demand trends and yield higher revenue and profitability per vehicle. The company diversified its fleet supplier base and utilized alternative fleet disposition channels, including direct-to-dealer sales and direct-to-consumer sales via the internet, to achieve higher resale values relative to traditional car auctions.
• Outsourcing and business process re-engineering. The company is standardizing work processes through the sharing of global best practices, with a focus on processes such as fleet management, vehicle preparation and cleaning, vehicle sales, logistics, transportation and maintenance. These efforts encompass the Hertz Improvement Process, an employee-driven program that utilizes Lean Six Sigma techniques to improve productivity.