The Hertz Corporation today announced that its board of directors has approved plans to separate into two independent, publicly traded companies. The two companies will be “Hertz,” comprised of the Hertz, Dollar, Thrifty and Firefly rental car businesses as well as Donlen, a provider of fleet leasing and management services, and “HERC,” the Hertz Equipment Rental Corporation. The separation is planned to be in the form of a tax-free spin-off to Hertz shareholders, and the Company has received a Private Letter Ruling from the Internal Revenue Service that allows Hertz to separate the businesses in a tax-efficient manner. Hertz expects the separation of HERC to close by early 2015.
Hertz will receive net cash proceeds from a HERC spin-off of approximately $2.5 billion that will be used to pay down Hertz debt and support a newly approved $1 billion share repurchase program. Under the new share repurchase program, the majority of the shares are likely to be purchased following the HERC separation, dependent on market conditions. The share repurchases could reach 20% of Hertz’s outstanding shares of common stock, which includes the $1 billion already approved. This new program replaces the $300 million share repurchase program that the Company announced in 2013, under which the Company has utilised approximately $87.5 million to repurchase Hertz shares.
Post separation, Hertz expects to maintain a target net corporate leverage ratio of between 2.5x to 3.5x net debt / EBITDA. Given Hertz’s new target net corporate leverage ratio, the Company may opportunistically look to return additional capital to shareholders on an ongoing basis, subject to market conditions and other factors.
“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 Mark P. Frissora, Chairman and Chief Executive Officer of The Hertz Corporation. “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.”
The Hertz board believes the planned separation of the equipment rental business from the car rental business would, among other things:
- Create a stronger growth profile and more competitive position for each company with enhanced management focus, resources and processes that are more directly aligned with each business’s unique strategic priorities;
- Optimise the companies’ capital structures based on the objectives of each independent company;
- Allow each business to attract and retain personnel by offering equity-linked compensation; and
- Create a more targeted investment opportunity with multiples and trading valuations that more accurately reflect the strengths and opportunities of each business.
Hertz Post Separation: A World Leading Rental Car Company
Following the separation, Hertz will remain a market leading rental car company with approximately 11,555 rental locations throughout North America, Europe, Latin America, Asia, Australia, Africa, the Middle East and New Zealand – the largest network in the world. The Company’s portfolio of brands includes Hertz, the number one airport and general use car rental brand in the world, as well as Dollar, Thrifty and Firefly, which reach other fast growing consumer segments within the leisure and value markets. Through Donlen, Hertz also offers fleet leasing and management services. The rental car and fleet leasing business had annual revenues of $9.23 billion in 2013.
Hertz will continue to focus on its key growth drivers following the separation. These include the integration of Dollar Thrifty, expanding its off-airport footprint and driving fleet efficiency, the introduction of new mobility services to meet consumer needs, building on its success with Donlen leasing, the roll-out of new rental technology, and its Lean / Six Sigma cost management programs.
The Company expects the separation of HERC to lead to an improved financial profile for Hertz, including less earnings volatility, higher returns on invested capital, and accelerated free cash flow growth. Hertz will target a corporate leverage ratio of 2.5x to 3.5x net debt / EBITDA. Post separation, the corporate leverage ratio is expected to be at the lower end of this range. This provides strength and flexibility across market cycles as well as a better ability to opportunistically return capital to shareholders. These financial strengths, together with the improved operating focus enabled by the separation and the continued operating and financial outperformance of the Hertz business, are expected to support a higher trading multiple for the new Hertz.
HERC Post Separation: A World Leading Equipment Rental Company
Following the separation, HERC will remain one of the largest and most diversified equipment rental businesses in the world with approximately 335 branches in the United States, Canada, France, Spain, China and Saudi Arabia, as well as through international franchisees. HERC, which has one of the youngest and most balanced fleets in the industry, rents a broad range of equipment, including aerial manlifts, air compressors and tools, earthmoving equipment and power generators, forklifts and material handling, pumps, and trucks and trailers. HERC also derives revenues from the sale of new and used equipment and consumables as well as through its Hertz Entertainment Services division, which rents lighting and related aerial products used primarily in the U.S. entertainment industry.
HERC had annual revenues of over $1.5 billion in 2013, with 38% of its 2013 revenues derived from the construction market, 26% from industrial, 36% from other markets including oil and gas, and from other specialty niche markets, such as pump and power, government services, and the entertainment industry.
Through investments in its fleet and 11 acquisitions and one joint venture since 2010, HERC has significantly expanded its product line, penetrated new end markets and broadened its geographic footprint, particularly within North America. As a separate company, with the resources devoted to its growth strategies, and management focus and compensation more closely aligned with the business, HERC will be better able to capitalise on these strengths and drive stronger operating and financial performance that is less impacted by market cyclicality.
As a standalone equipment rental company with a competitive operating profile, it is expected that HERC will be a leader among its peers. In addition to the expected strong growth in the business, a newly-public HERC will have an attractive currency to support its strategic initiatives in what remains a fragmented marketplace. At separation, it is expected that HERC will have a leverage ratio of 3.5x to 4.0x net debt / EBITDA. HERC will focus its capital allocation on fleet investment to drive growth, acquisitions and debt reduction.