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Hertz Gets More Focus and Cash With Spinoff of Equipment Rental Unit

Mar 18, 2014 9:20 am

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Hertz has lagged behind Avis Budget, which doesn’t mess around with an equipment rental basis. Hertz hopes it can get back on track with the spinoff, enabling it to give car rentals the focus it demands.

— Dennis Schaal

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Paul Sakuma  / Associated Press

In this May 9, 2011 file photo, a Hertz rental car worker checks out cars at San Jose International Airport in San Jose, Calif. Hertz on Tuesday, March 18, 2014 said it plans to spin off its equipment rental business into a separate publicly traded company. Paul Sakuma / Associated Press


Hertz Global Holdings Inc. said it will spin off its equipment-leasing division to focus on renting cars, a move analysts have pushed for since Hertz went public in 2006.

Hertz will separate into two publicly traded companies, with Hertz comprising car rentals and the Donlen fleet leasing business, and the other containing equipment rental operations, the Park Ridge, New Jersey-based company said today in a statement. Hertz will get cash proceeds of about $2.5 billion from the spinoff to pay down debt and support a new $1 billion share buyback. The spun-off company will be called Hertz Equipment Rental Corp., or HERC.

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.

Analysts including Brian Johnson of Barclays Plc 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.

Hertz shares have lagged behind Avis Budget Group Inc., which doesn’t have an equipment-rental unit. Hertz shares rose 76 percent last year, while Avis more than doubled. Through March 17, Hertz had fallen 4.9 percent this year, after a 4.8 percent jump yesterday, while Avis has risen 16 percent.

Buyback Plans

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.

Poison Pill

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, in line with the average analyst estimate of $11.59 billion.

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.

To contact the reporters on this story: David Risser in London at drisser@bloomberg.net; Mark Clothier in Southfield, Michigan at mclothier@bloomberg.net To contact the editors responsible for this story: David Risser at drisser@bloomberg.net Robert Valpuesta

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