Activist Lurking at Hertz Gives Push for Split: Real M&A

An activist investor may give Hertz Global Holdings Inc. the final push it needs to split off its equipment-leasing division and focus on renting cars.

Hertz surged to a record last week after adopting a poison pill amid “unusual and substantial” trading, which the company suspected marked the entrance of activists, according to people familiar with the matter. Northcoast Research Holdings LLC said the investors might want to speed up a spinoff or sale of the equipment-rental business, a separation that analysts have suggested since Hertz went public in 2006. Shareholder Roosevelt Investment Group Inc. said there isn’t a strategic benefit to keeping the unit tied to Hertz’s main car-rental business.

The $12 billion company may have attracted an activist after its returns last year lagged behind those of rival Avis Budget Group Inc., which doesn’t lease equipment, said Millman Research Associates. It’s an opportune time to finally separate rental equipment because an improving economy has boosted demand for the unit’s products and could give it a higher stand-alone value, according to MKM Partners LLC.

Activist investors probably “want to make sure that the company doesn’t delay and is pretty expeditious on the way it looks to create value by spinning off or selling” the division, Christopher Agnew, a Stamford, Connecticut-based analyst at MKM, said in a phone interview. “The prospects for the equipment-rental industry are healthy and continue to improve. In my mind, the timing works.”

Engaging Shareholders

Richard Broome, a spokesman for Hertz, said the Park Ridge, New Jersey-based company is focused on initiatives such as integrating Dollar Thrifty Automotive Group Inc., which it acquired in 2012, and expanding beyond airports.

“While it is Hertz’s policy not to comment on specific discussions with shareholders, we have had dialogue with a number of shareholders and welcome their input towards the goal of enhancing shareholder value,” he said in an e-mailed statement.

Hertz shares jumped as much as 11.5 percent on Dec. 31, the day after the company adopted a one-year shareholder rights plan. The company suspected that more than one activist investor had used options to take a position in its shares, two people familiar with the matter said last week, asking not to be identified because the information isn’t public.

Daniel Loeb’s Third Point LLC has taken a stake in Hertz and doesn’t intend to take an activist role, CNBC said Dec. 31, citing sources it didn’t identify. On Jan. 3, CNBC reported that billionaire Carl Icahn, who has pushed for changes at companies including Apple Inc., had acquired as many as 40 million Hertz shares. Third Point declined to comment, while Icahn didn’t respond to a request for comment.

Trailing Performance

Hertz shares rose 76 percent last year, while Avis more than doubled. In September, Hertz plunged the most since 2009 after cutting its forecast for 2013 profit and revenue, citing weaker-than-anticipated car rentals at U.S. airports.

Today, Hertz shares fell 0.1 percent to $27.66.

Hertz’s performance versus Avis may have increased activists’ interest in the stock, Michael Millman, managing member of Millman Research, said in a Dec. 30 report. Millman owns shares of both Hertz and Avis, according to the report.

An outspoken shareholder would probably push for a spinoff or sale of Hertz’s equipment-rental business, a scenario that’s been a topic of discussion for years, said John Healy, an analyst at Northcoast Research. As far back as May 2006, about six months before Hertz’s initial public offering, analysts asked management about separating the unit from the car division to unlock value, according to conference call transcripts.

The “two businesses aren’t really that complementary to one another,” Healy said in a phone interview from Cleveland. “They’re run independently and have two very diverse customer bases. There is value to be created” by separating them.

Cash Outlook

The equipment-leasing business targets a different type of customer than the leisure and business travelers that typically rent cars, said John Roscoe, a senior money manager at Roosevelt Investment. The unit, which leases products such as tree-stump cutters and flatbed trucks, is also very capital-intensive, he said.

After a split, the remaining car business should carry a higher valuation, said Roscoe, whose New York-based firm oversees about $4.5 billion including Hertz shares.

Without the equipment division, Hertz’s free cash flow would “dramatically increase” because of the elimination of estimated capital investments of $250 million in 2014 that would no longer be necessary, Kevin Milota, an analyst at New York-based JPMorgan Chase & Co., wrote in a Dec. 31 report.

“Now all the free cash flow that used to be put toward new equipment just stays in-house,” Fred Lowrance of Avondale Partners LLC said in a phone interview. “It should be a big number.”

Weighing Options

An activist could then seek to direct any proceeds from a divestment as well as increased free cash flow toward debt repayment and share repurchases, according to the Nashville, Tennessee-based analyst.

Hertz will need to weigh the benefits of spinning off versus selling the equipment business, said Healy of Northcoast Research. While a spinoff may have tax advantages, a sale may fetch a higher valuation because strategic buyers that see cost-cutting opportunities would offer a premium, he said.

The unit could have an enterprise value of $4 billion to $5 billion, based on the trading multiples of other rental-equipment companies, according to data compiled by Bloomberg Industries. It had sales of $1.5 billion in the 12 months ended Sept. 30.

Good Time

Potential suitors for the business could include United Rentals Inc. or London-based Ashtead Group Plc, which owns Sunbelt Rentals in the U.S., Healy said. Private-equity firms also could be interested, said Agnew of MKM.

A representative for Ashtead said the company declined to comment. A spokesman for Stamford, Connecticut-based United Rentals didn’t respond to a phone message or e-mail seeking comment.

With or without an activist’s push, now would be a good time for Hertz to finally take the leap and separate the equipment-rental business, said Agnew and Avondale’s Lowrance. The company has almost finished integrating its purchase of Dollar Thrifty and the outlook for the economy and demand for capital equipment has improved significantly, Lowrance said.

An activist is coming in “at a convenient time where we’re about to hit that tipping point,” the analyst said. “It probably makes sense.”

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