The Hertz Corporation’s board of directors has approved plans to separate into two independent, publicly traded companies.
The two companies will be "Hertz," comprised of the Hertz, Dollar, Thrifty and Firefly rental car businesses as well as Donlen, a provider of fleet leasing and management services, and "HERC," the Hertz Equipment Rental Corporation. The separation is planned to be in the form of a tax-free spin-off to Hertz shareholders, and the company has received a Private Letter Ruling from the Internal Revenue Service that allows Hertz to separate the businesses in a tax-efficient manner. Hertz expects the separation of HERC to close by early 2015.
Following the HERC separation, Mark Frissora will continue to lead Hertz as chairman and CEO. HERC will determine and announce its board of directors and management positions as the separation plans are finalized.
"The actions announced today will create separate companies which we expect to benefit from improved financial profiles that include increased earnings stability and higher returns on capital," Frissora said. "Our rental car and equipment rental businesses are leaders in their respective markets with valuable assets and tremendous long-term potential. Through unbundling these undervalued assets, we unleash current and future shareholder value. In fact, we believe there is a potential for multiple expansion even if both businesses only trade in line with their peers. Additionally, the separation will help each business focus on its strategic and operational performance. With respect to capital allocation, our new leverage ratios may allow for incremental return of capital to our shareholders given the current credit environment."
Hertz will receive net cash proceeds from a HERC spin-off of approximately $2.5 billion that will be used to pay down Hertz debt and support a newly approved $1 billion share repurchase program. Under the new share repurchase program, the majority of the shares are likely to be purchased following the HERC separation, dependent on market conditions. The share repurchases could reach 20 percent of Hertz's outstanding shares of common stock, which includes the $1 billion already approved. This new program replaces the $300 million share repurchase program that the company announced in 2013, under which it has utilized approximately $87.5 million to repurchase Hertz shares.
Post separation, Hertz expects to maintain a target net corporate leverage ratio of between 2.5x to 3.5x net debt/EBITDA. Given Hertz's new target net corporate leverage ratio, the Company may opportunistically look to return additional capital to shareholders on an ongoing basis, subject to market conditions and other factors.
The company expects the separation of HERC to lead to an improved financial profile for Hertz, including less earnings volatility, higher returns on invested capital, and accelerated free cash flow growth. Hertz will target a corporate leverage ratio of 2.5x to 3.5x net debt/EBITDA. Post separation, the corporate leverage ratio is expected to be at the lower end of this range.
HERC had annual revenues of more than $1.5 billion in 2013, with 38% of its 2013 revenues derived from the construction market, 26% from industrial, 36% from other markets including oil and gas, and from other specialty niche markets, such as pump and power, government services and the entertainment industry.
Through investments in its fleet and 11 acquisitions and one joint venture since 2010, HERC has expanded its product line, penetrated new end markets and broadened its geographic footprint, particularly within North America. As a separate company, with the resources devoted to its growth strategies, and management focus and compensation more closely aligned with the business, HERC will be better able to capitalize on these strengths and drive stronger operating and financial performance that is less impacted by market cyclicality.