Hertz to spin-off rental business in $2.5bn deal

May 2014 | DEALFRONT | MERGERS & ACQUISITIONS

Financier Worldwide Magazine

Hertz Global Holdings, the number two car rental company in the US, announced in March it had agreed to spin-off its equipment leasing business, creating two independent, publicly traded companies. Splitting Hertz into two distinct groups is a move some analysts have wished for since the company went public in 2006.

The first of the two companies, which will continue to operate under the Hertz name, will encompass the Hertz, Dollar, Thrifty and Firefly car rental businesses as well as the Donlen brand, which is a provider of fleet leasing and management services. The Hertz vehicle rental business will continue to operate across more than 11,500 rental locations globally.

The newly spun off equipment unit will be known as Hertz Equipment Rental Corporation (HERC), and will have about 335 branches in the US, Canada, France, Spain, China and Saudi Arabia, as well as a number of international franchisees. HERC had sales of more than $1.5bn in 2013, making it one of the world’s largest equipment retail businesses. HERC’s sales accounted for approximately 14 percent of the old Hertz’s total 2013 revenue of $10.77bn. Thirty-eight percent of HERC’s 2013 revenues were derived from the construction market, 26 percent from the industrial sector, and 36 percent from other markets including oil and gas, and other niche markets.

The car rental group will receive cash proceeds of approximately $2.5bn from the transaction on 18 March, to pay down existing debt and support a $1bn share buyback scheme. The bulk of the share repurchases will be completed after the separation process has closed, which, according to a statement released by Hertz, is expected by early 2015. The new buyback scheme, which replaces an abandoned $300m share program the company announced in 2013, may reach 20 percent of the company’s outstanding stock. The scheme resulted in purchases of around $87.5m in shares. Hertz expects to maintain its target net corporate leverage ratio of 2.5 times to 3.5 times net debt to EBITDA in 2014.

Under the terms of the agreement the separation of the two businesses will take the form of a tax-free spin-off to Hertz shareholders. Hertz, based in New Jersey, has received a Private Letter Ruling from the IRS which will allow the two companies to formally separate in a tax-efficient manner.

Once the transaction has been completed, Hertz will determine its management and board composition, however the company has already announced that Mark Frissora will continue in his joint role as the company’s chairman and CEO. “The actions announced today will create separate companies which we expect to benefit from improved financial profiles that include increased earnings stability and higher returns on capital,” said Mr Frissora. “Our rental car and equipment rental businesses are leaders in their respective markets with valuable assets and tremendous long-term potential. Through unbundling these undervalued assets, we unleash current and future shareholder value. In fact, we believe there is a potential for multiple expansion even if both businesses only trade in line with their peers. Additionally, the separation will help each business focus on its strategic and operational performance. With respect to capital allocation, our new leverage ratios may allow for incremental return of capital to our shareholders given the current credit environment.”

Hertz’s spin off announcement came approximately one month after the Volvo Car Corporation sold off its own equipment rental business, Volvo Rents, to private equity group Platinum Equity Partners.

Richard Summerfield