Late last month, Detroit was all aflutter with rumors that automaker Ford (NYSE:F) might be planning to shore up its balance sheet by selling profitable subsidiary Hertz. Then silence descended -- until yesterday.
Citing unnamed sources, the New York Post reported that Ford is now contemplating two possibilities simultaneously. In Plan A, Ford will continue discussing a sale of the Hertz business in its entirety, perhaps to one of several private equity funds reportedly interested in buying.
In Plan B, Ford will explore floating Hertz shares in an initial public offering. Or rather, "refloating" shares in a "not exactly initial" public offering. You see, this isn't the first time Ford has come up with this idea. Ford absorbed Hertz in 1993, only to begin trading it publicly four years later when Ford floated 20% of the subsidiary's shares in an IPO. Four years after that, in 2001, Ford changed its mind again, reabsorbing Hertz entirely by buying up its circulating shares at a cost of roughly $700 million.
Based on the 2001 acquisition price, Ford valued Hertz at $3.5 billion back in 2001. Today, independent analysts put the company's value anywhere from $2.5 billion to $4.0 billion (the latter figure being cited by the Post). But if selling the company today for the same amount it was worth four years ago doesn't sound like a terribly good return on investment, consider the alternative: Shares of Hertz's parent company have lost two-thirds of their value over the same time period. So Hertz's value has actually held up pretty well in comparison.
One reason Hertz has held its value is its continued profitability. While Ford remains profitable overall, not all of its constituent parts can say as much -- most notably, the part that actually makes cars. Hertz, however, is one of the "good" parts, contributing nearly $160 million in profits to the corporate whole in fiscal 2003, more than $365 million in fiscal 2004, and $33 million so far in a very rocky fiscal 2005.
Which perversely raises the question: How wise is it for Ford to be selling off one of its profit generators while retaining its money-losers? Perhaps Ford should hold on to Hertz and sell its assembly lines instead.
For more on Detroit's recent auto woes, read:
Fool contributor Rich Smith holds no position in Ford.
