Avis to issue 334m new shares

Troubled car rental firm Avis Europe unveiled plans today to raise £110.5m (€166.4m) to help arrest the slump in its profits.

The owner of the Budget and Avis brands said it was issuing 334.7 million new shares and launching a strategy to improve operating margins by up to five percentage points within the next four years.

Avis will offer shareholders four new shares for every seven of their existing holdings at a 44% discount to the closing share price of 63p yesterday.

This latest blow to investors comes after Avis ditched its full-year dividend payment in February because of tough trading conditions and the group said today that it does not intend to restore payments this year. Its shares fell nearly 10% today.

The car-rental industry has struggled since the September 11 terrorist attacks in the United States which led to fewer people wanting to travel by plane, while the economic slowdown in Europe has also hurt demand.

More customers have been hiring cars online and this has made it easier to compare prices and reduced the focus on the quality of service, the company said.

The impact on Avis has been lower volume growth and rental rates at a time when costs have continued to rise.

Chief executive Murray Hennessey said the rights issue was necessary for the group to recover from a halving of operating profits between 2001 and 2004.

He said: “It will fund targeted, profitable growth and strengthen our capital base.”

Optimism was based on rising disposable incomes in Europe, Asia, the Middle East and Africa, which is expected to lead to people spending more money on leisure and holidays.

Avis, which had net debts of €1.08bn at the end of April, said it had rejected the chance to split into an operating company and fleet financing firm in favour of the rights issue.

More than two thirds of the new shares will be bought by Brussels-based D’Ieteren, which already owns 60% of the company.

Avis pledged to reshape its business around its more profitable customers in two phases and warned that underperforming rental outlets could be relocated to areas with lower costs or where they are likely to attract more customers.

It has already begun to invest more money in sales and marketing to encourage more people to book using its website and is making its prices more flexible to demand.

Costs have also been stripped out, with Avis halting commissions on directly contracted business, while its IT workforce has been cut by 125 staff since October.