Hertz Is Well Equipped to Spin Off Division

Dividing the company in two will allow the car rental agency to focus on its global business.

Mar 19, 2014 at 10:26PM

Bowing to pressure from activist investors who suddenly took a keen interest in Hertz (NYSE:HTZ) last year, the car rental giant announced that it will be spinning off its equipment rental business HERC in a tax-free transaction that will net it cash proceeds of approximately $2.5 billion, which it will use to pay down debt and finance a new $1 billion stock buyback program.

Hertz Equipment Rental Location

Source: Hertz Equipment Rental.

In the wake of a consolidation drive that had Hertz acquiring Dollar Thrifty and No. 2 car rental agency Avis Budget Group (NASDAQ:CAR) picking up Zipcar and Payless, hedge fund Third Point Capital acquired a large tranche of Hertz stock while billionaire investor Carl Icahn was also said to have taken a piece of the company. It also held meetings with Corvex Capital.

Just in case any one of them decided they wanted to go on a share buying spree to acquire the company itself, force its sale, or demand a special dividend be paid, Hertz adopted a one-year poison pill defense that would severely dilute the buyer's stake if more than 10% of company's stock was acquired.

As the Fool's Daniel Jones points out, the company issued rights to all shareholders on Jan. 9 to buy one-ten-thousandth of a preferred share in the company for a price of $115 for each common share held. If someone attempted a takeover, they'd also have to agree to pay 10,000 times the price of each preferred share, virtually guaranteeing no one would do so.

The equipment rental spinoff has been on the table for some time, as it has been an erratic performer, though worldwide equipment rental accounted for $1.5 billion of the car rental agency's $10.8 billion of revenue for all of 2013, and $292 million of its $1.2 billion in adjusted pre-tax profit. The equipment revenues represent an 11% increase of 2012, while the non-GAAP profits were up 29% year over year as it saw strong increases in volume and pricing. With 38% of its revenues coming from the construction market, 26% from industrial, and the rest from oil and gas and from other niche markets, the business remains dependent on firm global economic growth, an outlook that's wobbly at best.

Yet the spinoff comes as there's increased activity in the equipment rental industry. The leading player, United Rentals (NYSE:URI), said earlier this month it was buying privately held National Pump for $780 million to gain increased exposure to the natural gas shale boom. Upstream oil and gas customers account for about half of National Pump's revenue. Of course, United is the one driving most of that activity as it nearly doubled in size last year following the acquisition of RSC.

IHS Global Insight forecasts the equipment rental industry is still in for some heady growth despite economic uncertainty, estimating U.S. revenues will rise 8.4% in 2014 and more than 11% growth in 2015, after which it will level out for the next two years.

It certainly seems like the right time for Hertz to price its business in the market, and it will allow management of both companies to focus on their unique businesses. After the separation, which is expected to be completed by early next year, Hertz will be left with its eponymous brand as well as Dollar-Thrifty and Firefly, and will operate from over 11,500 rental locations worldwide. Additionally it will keep its corporate fleet leasing and management services provider, Donlen, which together with car rentals, will have annual revenues of $9.2 billion.

Shares of Hertz are up 27% over the past year and are more than 7% above their 52-week lows. The spinoff, while anticipated for some time, gives investors hope the car rental world's biggest car renting network can now drive to new heights unencumbered.

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Rich Duprey has no position in any stocks mentioned. The Motley Fool owns shares of Hertz Global Holdings. Try any of our Foolish newsletter services free for 30 days. We Fools don't all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.

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