Ford's Painful Spinoff

Well, it's official. According to an SEC filing made yesterday, Ford (NYSE:F) has decided to go ahead with an initial (but not really) public offering for its Hertz rental car unit. The plan appears to be to first float $100 million worth of shares in the company, which as we've previously mentioned has been appraised at anywhere from $2.5 billion to $4 billion in value as a whole.

Clearly, Ford's rationale for spinning off Hertz is not to make a profit off its most recent acquisition of the few shares it did not already own. Four years ago, the $700 million that Ford paid for Hertz's shares imputed a value of $3.5 billion to the rental unit. Even if Ford can get that much for Hertz today (unlikely, as it's going to be a buyer's market now that everyone and his grandmother knows what financial straits Ford is in), that would still mean the parent company profited not at all from its outlay of shareholder capital four years ago.

Ruling out "return on investment," it seems Ford can have only one reason for parting with Hertz: to raise cash to pay down its own debt, and if at all possible, to shuffle off as much of its own debt onto buyers of Hertz.

But what's good for Ford may not necessarily be a good thing for Hertz buyers. In its S-1 filing, Hertz shows that it has grown its revenues just 15% in total over the past four years. That's a compounded annual increase of just 3.6%. And the unit's net income story reads even worse. In fiscal 2000, Hertz earned $358.4 million. Last year, the unit earned $365.5 million. Compound rate of annual return: 0.5%.

Now granted, that's a bit of an oversimplification. Along the road to 2004, Hertz has taken the long and volatile path to essentially flat earnings. Net income crashed from that 2000 number in 2001, went negative in 2002, and has rapidly turned around in the last two years. Still, the end result is basically no growth over the past four years.

Still thinking of buying into Hertz? Well consider that, were you to buy the whole company at the generous price of $4 billion, you'd be getting an F-350-load worth of debt and contractual obligations along with your new company. Again referring to the S-1, when Hertz goes public again, it will bring with it $8.5 billion in debt, $1.3 billion in operating leases and $6.5 billion worth of obligations to purchase cars and trucks from Ford and other manufacturers.

Invest in Hertz? Just thinking about it pains me.

For more recent Ford news, read:

• Ford Takes a Bullet for Visteon
• Leaving Hertz
• At Least It's a Profit

Fool contributor Rich Smith holds no position in Ford.