The Rental Industry's Changing Landscape

Feb. 1, 2008
Since 1996, the equipment rental industry has seen some very interesting changes, from the major consolidation beginning in 1996 to now where the top

Since 1996, the equipment rental industry has seen some very interesting changes, from the major consolidation beginning in 1996 to now where the top three national rental companies have been acquired by equity firms1, taken private and/or moved back to a public company a second time. Or, in the case of United Rentals, the acquisition wasn't consummated.

Not bad in a period of four or so years. Some companies were truly rewarded for their investments. But what does that mean for our industry going forward? Is it positive or negative for the independent owners and good or bad for the rental industry? My sense is it is great for the independents, and changes for the rental industry overall are minimal and here's why.

Consider the recent acquisition attempt of United Rentals by Cerberus for $6.7 billion. What can be anticipated within our industry — the equipment world's largest rental company failed acquisition? First consider equity ownership. These firms are generally involved for the very short term, maximum 24/36 months, unless the economic climate is not favorable for a sale or a new IPO. The equity team will obviously look at the immediate cost-cutting opportunities to increase the bottom line and EBITDA percentages and that will include a downsize restructuring of the company's in-place management team, marginal or only moderately profitable store locations will be eliminated, and consolidation of rental inventory to locations where the business warrants and supports the additional fleet numbers.

One option is to “sell off” non-essential or under-utilized equipment, which will also negatively impact the industry in some areas (used equipment glut) but will conversely provide opportunities for independents to economically increase their fleets if financing is available. Major annual rental fleet new product acquisitions will be significantly reduced or adjusted monthly gauging unit return on assets, which will affect equipment manufacturers. But fortunately for the manufacturers that will provide product availability for the international markets, which will not see any dramatic downturn in unit shipments. Weak U.S. currency increases inter-national export business. Rental business operations will focus on the “Quarter” mentality with minimal if any long-term strategic planning.

What if …?

Here is where the “what if “scenarios begin to play out and whatever effects they will have in our industry need to be examined.

If United Rentals or the other three major equity-owned rental companies are sold to private firms there will be a significant amount of debt placed on the company's balance sheets, forcing them to decrease or eliminate all unnecessary operational costs, minimize greenfield startups, rationalize fleet profiles and reduce headcounts. Much of these are positives for the independent rental owners with the exception of a potential downward rental rate pressure when the larger players want profits driven by rental fleet utilization. With smart purchasing, blending new, used and refurbished fleet, the independent rental owners are once again in the position to grow their companies within their operational areas.

So what happens with the big three? Possibly a further consolidation: No.1 buys No.2 or visa versa1? CAT or Volvo Rents decide to really step into the rental industry with more pace, more locations and diversified product offerings? Again basically the same will happen: significant debt load, requiring major cost reductions (people, locations, rental fleet consolidation/reductions), rental rate downward pressures, efforts to increase fleet utilizations and we have 1999/2000 domestically in our industry all over again.

As an independent rental owner, what can you do to prepare for another roller coaster rental industry for the next two years or so?

  • Meet with your accountant with an eye to re-establishing or enhancing your banking relationships, and secure additional lines of credit if the right opportunity materializes (product, facilities, etc.). Utilize your manufacturer's sponsored leasing programs.

  • Evaluate your market; are you missing some potential rental/sales opportunities?

  • Evaluate your personnel resources, as there may be an opportunity for some new, very qualified talent that will help you grow within your rental market.

  • Optimize your rental fleet by shedding non- to minimally-profitable units, or units with significant repair costs prior to any used equipment market glut (significant price reductions).

The potential market changes have the opportunity to be very good for our rental industry not only for the equity-owned national and privately owned regional rental companies, but also for the local/community rental centers. Preparation with foresight is key, as many within our industry weathered the last downturn very successfully and now with the knowledge of a potential industry “hiccup” we can be even better prepared.

  1. Note: United Rentals, publicly traded corporation; RSC, Ripplewood Group; Hertz, Carlyle Group; Neff, Lightyear Capital

  2. Note: Regardless of which company purchases the other, a significant amount of local store overlap will occur.

Frank Scarborough is president of Snorkel U.S.A., St. Joseph, Mo.