United Rentals Inc., the biggest U.S. equipment rental company, agreed to buy RSC Holdings Inc. for $1.9 billion to add sales from more stable industrial customers.
The offer of $18 a share is a 58 percent premium to RSC’s closing price yesterday, the companies said in a statement today. That compares with an average premium of 55 percent in more than four dozen acquisitions of automotive and equipment rental companies announced since the end of 2008, Bloomberg data show. RSC shares climbed the most ever.
United Rentals, whose sales last year were 32 percent below a pre-financial crisis high amid declining construction, said the purchase will provide “less volatile” revenue. The combined company expects to benefit from “continued strength” in manufacturing and a recovery in construction.
“This transaction marks a transformative moment in our company’s history,” United Rentals Chief Executive Officer Michael Kneeland said in the statement. “We have a tremendous opportunity to become the supplier of choice for customers throughout North America.”
For each RSC share, investors would receive $10.80 in cash and 0.2783 share of United Rentals, the companies said. The company plans to authorize a $200 million share buyback and complete it within six to 12 months after closing. The deal is subject to regulatory and shareholder approvals.
United Rentals Debt
United Rentals’ 8.375 percent notes payable in September 2020, the most actively traded issue, dropped to 96.5 cents on the dollar from 100.3 cents yesterday. The yield increased to 8.96 percent.
United Rentals’ credit ratings were affirmed by both Standard & Poor’s Ratings Services and Moody’s Investors Service. S&P maintained its B grade, five steps below investment level, while placing the North American subsidiary’s senior unsecured notes on CreditWatch with negative implications.
The purchase should reduce United Rentals’ dependence on the cyclical commercial construction market, though credit analysts Sarah Wyeth and John Sico noted the increased leverage and “integration risk inherent in a transaction of this size.” Profitability will be supported by the lower cost of renting equipment to industrial customers, S&P said.
“URI can adopt some of RSC’s operational efficiencies and improve profitability to be closer to RSC’s historically higher margins,” Wyeth and Sico wrote.
Moody’s put some of RSC’s bonds under review for an upgrade because of expected “operating synergies” from the acquisition.
United Rentals’ offer is equivalent to 3.8 times the target company’s earnings before interest, taxes, depreciation and amortization, compared with a median multiple of 3.4 times ebitda in seven acquisitions since 2008.
Including $2.3 billion of RSC’s debt, the deal would have an enterprise value of $4.2 billion, the companies said. The combination may generate annual cost savings of as much as $200 million.
United Rentals CEO Kneeland and Chairman Jenne Britell will keep their positions after completion of the acquisition, which the companies said they expect to close in the first six months of 2012.
RSC’s largest shareholder, Oak Hill Capital Partners, agreed to vote its 33.5 percent stake in favor of the acquisition, according to the statement.
RSC climbed 58 percent to $17.95 at 4:15 p.m. in New York trading, the biggest gain since May 2007. United Rentals increased 7.1 percent to $27.89.
Morgan Stanley, Bank of America Corp. and Wells Fargo & Co. agreed to provide financing to United Rentals.
Centerview Partners and Morgan Stanley advised United Rentals, and Sullivan & Cromwell provided legal counsel. Barclays Plc and Goldman Sachs Group Inc. were RSC’s lead financial advisers, and Deutsche Bank AG also advised. Paul, Weiss, Rifkind, Wharton & Garrison as well as Debevoise & Plimpton provided legal counsel.