Hertz Global Holdings Inc. said Tuesday that 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 fleetleasing business, and the other containing equipment-rental operations, the Park Ridge, N.J.-based company said 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 spunoff company will be called Hertz Equipment Rental Corp., or HERC.
“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.
Analysts have pressed executives to provide detailed plans for the unit. The business, which rents bulldozers, excavators and road graders, ties up capital that 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 shares fell 14 cents to close Tuesday at $27.08. The 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 Monday, Hertz had fallen 4.9 percent this year, after a 4.8 percent jump Monday, while Avis had risen 16 percent.
The separation will probably be completed by early next year, 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 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.
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 Tuesday 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 company will have about 335 branches in the U.S., Canada, France, Spain, China and Saudi Arabia, as well as international franchisees. Hertz Equipment Rental Corp. had sales of more than $1.5 billion in 2013.
Business on 03/19/2014