Hertz to Spin Off Equipment Renting Business - Analyst Blog

Shares of vehicle rental giant, Hertz Global Holdings Inc. HTZ, witnessed a significant 7.7% rise in the pre-market trading session today as the company communicated the spin-off of its construction equipment rental business a short while ago. This news was earlier reported by Financial Times on Friday evening, triggering a 4.8% rise in the company's shares during Monday's trade.

The board at Hertz announced its decision to separate the company into two independent, publicly traded companies. The first company will retain Hertz's car rental businesses comprising Hertz, Dollar, Thrifty and Firefly as well as its fleet leasing services division called Donlen. The second company emerging from the separation will be named ‘Hertz Equipment Rental Corporation' or ‘HERC' and will comprise the company's equipment rental business.

The spin-off, which will be a tax-free transaction for Hertz' shareholders, is expected to generate $2.5 billion proceeds for the company. Hertz plans to use the proceeds to lower debt and fund a newly approved $1 billion share buyback program. The share repurchase program, which will commence following the completion of the spin-off, will replace the company's existing $300 million buyback program.

The spin-off is expected to improve the financial profiles of both companies, ensuring stabilized earnings as well as higher returns on capital. Further, it will help improve management focus on each of the separated businesses, which enjoy a leading position in their respective markets.

Hertz as an independent car rental company (post spin-off) will operate from nearly 11,555 rental locations throughout North America, Europe, Latin America, Asia, Australia, Africa, the Middle East and New Zealand, marking the biggest car renting network across the globe.

Major points of focus for this car renting behemoth following the separation will include the smooth integration of Dollar Thrifty, growing its off-airport presence and efficient fleet management, promoting mobile services to meet customer requirements, further developing its Donlen leasing business, introducing new rental technology and efficiently managing costs through its Lean/Six Sigma programs.

Further, with an improved financial profile following the separation, the company targets a corporate leverage ratio of 2.5x to 3.5x net debt / EBITDA. Hertz's car rental and fleet leasing business generated annual revenues of $9.23 billion in fiscal 2013.

On the other hand, the newly formed HERC will be positioned as the world's leading and most diversified equipment leasing business. Operating through a network of 335 branches in the United States, Canada, France, Spain, China and Saudi Arabia, as well as through international franchisees, the company generated annual revenues of more than $1.5 billion in fiscal 2013. As a separate entity, HERC targets a leverage ratio of 3.5x to 4.0x net debt / EBITDA, with its capital allocation primarily focused on fleet investment to drive growth, acquisitions and debt reduction.

Following the separation, Hertz will continue to be led by its existing Chairman and Chief Executive Officer, Mark Frissora, while HERC will determine its board members and management positions once the separation is finalized.

Quoting a similar transaction, Sears Holdings Corp. SHLD recently reached the final stages of its previously announced spin-off of Lands' End. Slated to complete the spin-off on Apr 4, 2014, the company will be divided into two companies, Sears Holdings Corp., retaining the same ticker symbol and Lands' End Inc. with a new ticker symbol “LE”.

Other Stocks to Consider

Hertz currently holds a Zacks Rank #3 (Hold). Better-performing stocks in the business services industry include SouFun Holdings Ltd. SFUN and Rentrak Corporation RENT. While SouFun Holdings has a Zacks Rank #1 (Strong Buy), Rentrak carries a Zacks Rank #2 (Buy).