Hertz Will Spin Off Equipment Rental Unit to Focus on Cars
Hertz Global Holdings Inc. (HTZ) will spin off its equipment-leasing division to focus on car rentals, a move analysts have pushed for since Hertz went public in 2006.
Hertz, based in Park Ridge, New Jersey, will separate into two publicly traded companies. The car-rentals business will keep the name Hertz and get cash proceeds of about $2.5 billion to pay down debt and support a $1 billion share buyback. The spun-off company will be called Hertz Equipment Rental Corp., or HERC, according to a statement.
“Investors will receive the HERC spin announcement with open arms, offsetting what was otherwise a soft quarter from an operating and fiscal year 2014 guidance perspective,” Kevin Milota, an analyst at New York-based JPMorgan Chase & Co., wrote in a research note. He rates the shares overweight, the equivalent of a buy.
Analysts have pressed executives to outline plans for the unit. The business, which rents bulldozers, backhoes and road graders, ties up capital Hertz could otherwise use to repay loans or pay dividends, analysts have said.
The move will “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,” Hertz said.
Hertz fell 0.5 percent to $27.08 at the close in New York. The stock has lagged behind Avis Budget Group Inc. (CAR), which doesn’t have an equipment-rental unit. Hertz shares rose 76 percent last year, while Avis more than doubled. Hertz has fallen 5.4 percent this year while Avis has risen 20 percent.
Hertz will comprise car rentals and the Donlen fleet leasing business, the company said.
The separation of HERC will probably be completed by early 2015, the company said. The majority of share repurchases will be done after the separation, and may reach 20 percent of outstanding stock, it said. The new plan replaces a $300 million program announced last year, which has resulted in purchases of about $87.5 million in shares, according to Hertz.
The separate companies will “benefit from improved financial profiles that include increased earnings stability and higher returns on capital,”Mark P. Frissora, chairman and chief executive officer, said in the statement.
The car rental business will maintain its target net corporate leverage ratio of 2.5 times to 3.5 times net debt to earnings before interest, taxes, depreciation and amortization.
Given the debt commitment, Hertz “may opportunistically look to return additional capital to shareholders on an ongoing basis,” it said.
Bank of America Merrill Lynch and Barclays Plc are acting as financial advisers on the transaction, while Jenner & Block LLP and Debevoise & Plimpton LLP are providing legal counsel, Hertz said in the statement. KPMG LLP is giving tax advice.
Hertz adopted a so-called poison pill on Dec. 30 after seeing “unusual and substantial activity” in its stock. Hertz said the plan wasn’t adopted in response to any specific takeover bid or proposal to acquire the company.
Hertz also said today that fourth-quarter sales rose 10 percent to $2.56 billion, driven by car rentals at Dollar Thrifty, acquired in November 2012. The average analyst estimate in a Bloomberg survey was for revenue of $2.62 billion. Worldwide equipment rental revenue rose 4 percent.
Adjusted pretax income fell to $186.3 million in the quarter, from $210.7 million a year earlier.
Hertz said it anticipates 2014 revenue of $11.4 billion to $11.7 billion. Analysts had forecast $11.59 billion on average, according to data compiled by Bloomberg.
Hertz has more than 11,500 rental locations around the world. Brands include Hertz, Dollar, Thrifty and Firefly. The new HERC company will have about 335 branches in the U.S., Canada, France, Spain, China and Saudi Arabia, as well as international franchisees. HERC had sales of more than $1.5 billion in 2013.
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