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How Will the IPO Market Treat Zipcar?

Despite strong revenue gains, the car-sharing service has yet to turn an annual profit, faces increased competition, and has a tricky merger to execute.

Zipcar, the car-sharing club for city dwellers, filed for a $75 million initial public offering on Tuesday. (Read the filing here.)

The 11-year-old company should present an interesting test for an IPO market that is showing signs of life, but remains rather fickle. As the AP pointed out Tuesday, roughly a third of the IPOs expected in May postponed plans or withdrew deals, and those that did make it to market had to offer deep discounts.

Making things particularly difficult for Zipcar, which has more than 400,000 members in 13 major cities and 150 college campuses, may be the fact that it has never turned an annual profit. Despite revenue rising 22.5 percent to $33.2 million in the first quarter of 2010 from a year earlier, its net loss widened from $3 million to $5.3 million over the same period. Zipcar – No. 375 on Inc.'s 2009 500 list – said in the SEC filing it also expected losses in 2010. (Read an Inc. cover story about Zipcar.)

Zipcar pioneered the car club service of charging an annual membership and renting cars at an hourly or daily rate – popular in urban areas and college towns where car ownership is lower and parking is expensive. But the market's growth has drawn more competitors to the space, including large rental car companies such as Hertz and Enterprise.

"The nationals are recognizing there is a market for renting a car for an hour or four hours or a day," IPO Boutique senior managing partner Scott Sweet told Reuters. "They could easily undercut and replicate what Zipcar does."

In April, Zipcar acquired London, England's Streetcar, the U.K.'s largest car-sharing service, in a deal reportedly valued at $50 million. According to its SEC filing, Zipcar – which has had a presence in London since 2006 – thinks the city could become "one of the world's largest car sharing markets based on its commuting characteristics, financial burdens of car ownership, demographics and other factors."

However, the acquisition could be a tricky one for Zipcar. In its SEC filing, Zipcar said it expects 'the integration of Streetcar to be particularly challenging given that Streetcar is our first large-scale international acquisition and the need to coordinate across multiple time-zones.'

Additionally, Zipcar said in the filing that U.K. antitrust authorities may review the Streetcar acquisition, which could delay the integration of operations or derail the deal completely. Zipcar said it intends to comply with a request from the U.K. Office of Fair Trading to enter into an agreement to hold the two companies separate while the regulator determines whether it is entitled to review the transaction.

The IPO, if successful, would help the company pay down its debt. The company is 23 percent owned by Revolution Living, co-founded by former AOL CEO Steve Case. (In 2007, Zipcar merged with its largest competitor, Case's Seattle-based Flexcar.) Other shareholders include Benchmark Capital, Greylock Partners and Smedvig Capital. Zipcar plans to list on the NASDAQ under the symbol ZIP.

Research firm Frost & Sullivan has predicted that revenue from car-sharing services could hit $3.3 billion in North America and $3.2 billion in Europe by 2016. That's up from $253 million and $269.7 million in 2009, respectively. In its SEC filing, Zipcar says, "the Frost & Sullivan market forecasts are more likely achievable by 2020."

Inc. contributing editor Courtney Rubin was for five years a London-based staff writer for People magazine. Rubin, a former senior writer for Washingtonian magazine, has written for the New York Times magazine, Time, Marie Claire, and other publications. She is the author of The Weight-Loss Diaries.