16.12.2011

United acquires RSC

United Rentals and RSC Holdings have announced that they have entered into a definitive merger agreement under which United Rentals will acquire RSC in a cash-and-stock transaction valued at $18.00 a share - an almost 60 percent premium on yesterdays closing price - for a total enterprise value of $4.2 billion, including $2.3 billion of net debt.

The directors of both companies have unanimously approved the proposed transaction and recommended it to their shareholders. RSC shareholders will receive $10.80 in cash plus one United Rentals share for every 3.59 RSC share, giving RSC shareholders a stake of around 30 percent in the enlarged company. RSC was sold in late 2006 by its then owner, Atlas Copco, for $3.8 billion.

The deal between the world’s largest equipment rental company and the second largest North American rental company, creates a combined business that will approach a dominant position in the US rental market. The combined business is likely to have revenues this year in the region of $4 billion.

The deal is subject to numerous closing conditions, including approval by shareholders, (Oak Hill Capital Partners has already voted its 33.5% stake in RSC in favour of the transaction) and antitrust approval.

United Rentals and RSC have already begun working on a plan to facilitate a smooth integration of the businesses and have identified annual costs savings of around $200 million, two thirds of which it thinks can be saved in the first year.

United’s chief executive Michael Kneeland said: “This transaction marks a transformative moment in our company’s history. Combining the experience and resources of two top performing equipment rental companies creates an exceptional company. The new United Rentals will build upon the best practices and management teams from both companies to deliver superior customer benefits and enhanced value for our stockholders. With the best talent in the industry, we have a tremendous opportunity to become the supplier of choice for customers throughout North America.”

Erik Olsson, chief executive of RSC added: “RSC has a strong track record of profitable growth and we are proud of what we have built. At the same time, I am confident that by partnering with United Rentals we can accomplish far more than either company could have achieved on its own, including significant synergies. As a result, the transaction delivers significant value to our shareholders. Our similar customer-centric cultures and commitment to operational excellence will provide even greater value to our customers and facilitate a smooth integration. I look forward to helping to lead the integration process during a transition period.”

The cash portion of the transaction will be financed through new debt and by drawing on current loan facilities. Financing commitments have been obtained from Morgan Stanley Senior Funding, Bank of America Merrill Lynch and Wells Fargo.

The deal is expected to close in the first half of 2012.

Vertikal Comment

While there have been rumours of a big deal going on for the past few weeks, this one caught us napping – unusual when two companies of this size are involved – however given the 52 percent jump in the RSC share price after the announcement, we were not the only ones.

Until October 2006 RSC was owned by Atlas Copco which, finding the rental business difficult, sold the majority of the business to Ripplewood Holdings and Oak Hill Capital. Since then the company has struggled to come close to matching the performance of United or smaller top 10 companies like Sunbelt.

The company did return to profit in the third quarter when it reported pre-tax profits of $26.1 million on revenues of $407 million.

Given United’s already strong geographical coverage, one has to assume that the overlap between locations will be substantial, as a result it is unlikely that two plus two will make anything like four in this deal. The major beneficiaries are likely to be Sunbelt and others large regionals such as Ahern.

Equipment manufacturers will also be assessing their positions and the likely impact of this deal which is almost certain to result in lower capital expenditure for the merged entity than when separate.

In spite of these reservations the deal is likely to satisfy the majority of the two companies shareholders. United has acquired its largest competitor at not far off the bottom of the cycle, while RSC shareholders are almost certain to see a rosier return on their investment going forward, having taken a cash payment out that is only marginally below Thursday’s closing of $11.37.

The challenge now will be with Michael Kneeland and his team to hold on to as must of the RSC business as possible while maintaining the strong profit growth trends that United has been achieving of late. And making the first year cost savings of $133 million of course.

The fact that Ashtead shares jumped over five percent while United’s held fairly steady during the first hours of trading this morning says a lot. This could be a great deal for United, but it has a lot of work on its hands to make it so.