US antitrust regulators are investigating whether Macquarie Group's private-equity arm violated a consent decree allowing it to buy the Advantage rental car brand from Hertz Global Holdings.
Macquarie, in a joint venture with Franchise Services of North America, bought Advantage from Hertz under a November agreement with the US Federal Trade Commission that let Hertz buy Dollar Thrifty Automotive Group.
The deal bolstered Hertz's position as the second-largest US rental car service, behind Enterprise Holdings. The FTC, concerned about the major chains shrinking to three from four, demanded that Hertz sell locations, re-creating a fourth competitor after Dollar Thrifty was absorbed and moderating the prices people pay to rent cars at airports.
The agency is now concerned that Macquarie isn't following through on commitments it made to expand and strengthen Advantage, according to two people familiar with the matter who asked not to be named because the probe is confidential.
FTC officials, who haven't given a final sign-off on the transaction, were troubled by Macquarie's December ouster of industry veteran Sanford Miller, who was to run Advantage under the agreement, the people said.
"We have been responding to FTC questions and working with commission staff, and we believe the FTC will sign the consent decree in the near future," said a spokesman for Hertz, Richard Broome.
The FTC's compliance office is believed to be deciding whether the Advantage transaction needs to be scrapped or restructured to ensure the new company can compete with its larger rivals. The larger Hertz-Dollar Thrifty transaction probably would not be challenged by the agency, sources said.
Possibilities include bringing in another buyer and ordering Hertz to divest more locations. Evidence that investments in the new company were scaled back and that rental car prices were rising is fuelling the FTC's concerns, they said.
The FTC could go back to Hertz and ask it to divest more locations to give some more scale to the Advantage brand, said Fred Lowrance, senior research analyst with Avondale Partners in Tennessee. Still, an investigation of Macquarie shouldn't worry Hertz investors, he said.
"If you run all the reasonably plausible scenarios, there is no material impact to Hertz' earnings," said Mr Lowrance. "Maybe Hertz would need to help them find another buyer, or add a few locations to the divestiture package, but nothing that's likely to have any impact on the Dollar Thrifty merger itself."
Almost five months after the FTC announced a consent decree with Hertz to allow the merger, the agency hasn't issued a final order. Under normal FTC timelines, the consent decree would have received final approval in December, after allowing 30 days for public comments.
"The fact that the FTC hasn't approved the transaction after such a significant time frame means there are probably serious concerns being raised," said David Balto, a Washington antitrust attorney who represents consumer groups. He is not involved in the transaction.
"They can reject the consent order if they want to, or force them to restructure it," he said.
Mr Miller, who was supposed to run Advantage, was forced out five days before the acquisition closed and replaced by his co-chief executive officer at Franchise Services, Thomas McDonnell.
The FTC said it ordered Hertz to divest 29 Dollar Thrifty rental car counters in addition to the Advantage business to protect consumers, citing the $11 billion spent to rent 50 million vehicles at US airports each year.
Together, Hertz, Dollar Thrifty, Enterprise Rent-A-Car and Avis Budget control about 98 per cent of total airport car rentals in the US, the FTC said.