The Hertz Corp. today announced that its 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 Corp.
The separation is planned to be in the form of a tax-free spin-off to Hertz shareholders, and Hertz 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, says the company.
Hertz will receive net cash proceeds from a HERC spin-off of approximately $2.5 billion, which will be used to pay down Hertz debt and support a newly approved $1 billion share repurchase program, says the company. 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% of Hertz's outstanding shares of common stock, which includes the $1 billion already approved, says the company. This new program replaces the $300 million share repurchase program that Hertz 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, says the company. Given Hertz's new target net corporate leverage ratio, it may opportunistically look to return additional capital to shareholders on an ongoing basis — subject to market conditions and other factors.
"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," said Mark P. Frissora, chairman and chief executive officer of The Hertz Corp. "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," added Frissora.
Here are some advantages to separating the equipment rental business from the car rental business, according to the Hertz Board:
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.
Optimize the companies' capital structures based on the objectives of each independent company.
Allow each business to attract and retain personnel by offering equity-linked compensation.
Create a more targeted investment opportunity with multiples and trading valuations that more accurately reflect the strengths and opportunities of each business.
Following the HERC separation, Frissora will continue to lead as Hertz’s chairman and chief executive officer. And HERC will determine and announce its board of directors and management positions as the separation plans are finalized, according to Hertz.
