RSC 'Primed' to Join Atlas Copco

July 1, 1999
SCOTTSDALE, Ariz. - Round and round they go. When it stops, nobody knows. In the equipment rental industry's high-stakes game of musical chairs, Atlas

SCOTTSDALE, Ariz. - Round and round they go. When it stops, nobody knows. In the equipment rental industry's high-stakes game of musical chairs, Atlas Copco is now seated with Rental Service Corp. - $1.63 billion, apparently, requires no prior reservation.

That's how much the Swedish air compressor manufacturer offered June 28 for the right to team RSC with its other billion-dollar rental investment, Prime Service. At $29 per share, or $730 million in cash, and the assumption of about $900 million in debt, it would be the largest deal in rental history.

It would also create the second largest rental company behind United Rentals, which had been knocking on RSC's door with a $22.75-per-share offer since April.

Assuming the deal goes through next month as expected, Atlas Copco - which fired the original shot heard 'round the rental world when it paid a then-record $1.16 billion for Prime in 1997 - will have strengthened its grip on the U.S. rental market. It will also have substantially bulked up its North American distribution channel; RSC operates 272 rental outlets in North America, while Prime Service has 182 locations. Rental equipment will make up 30 percent of Atlas Copco's total assets upon completion of the deal.

"This is a great move on Atlas Copco's part," Dan Perlin of investment bank Legg Mason Wood Walker told RER. "With this deal, they are building a strong channel for distribution of their product.

"This also is an opportunistic way for Atlas Copco and Prime to play catch up in the consolidation game," Perlin said. "Prime had dropped out of the M&A game, and now it has caught up in a big way."

Atlas Copco coughed up in a big way, too. The $29-a-share bid - which shocked many in the industry - equates to about 6.9 times RSC's trailing 12-month EBITDA and to 27 percent more than United's $22.75 offer.

"This is a significant premium, but then Atlas Copco has a history of making large acquisitions with steep premiums," said a merger and acquisition specialist.

However, Atlas Copco, as a manufacturer, has a different set of parameters in setting purchase prices than a consolidator such as United Rentals, notes Latek Capital Corp.'s Ed Latek. "I don't believe you can use a Readers' Digest approach to analyzing deals such as these," Latek said. "Deals such as these are much more complicated."

United drops out The announcement of Atlas Copco's bid prompted almost immediate capitulation from United, whose previous $1.36 billion offer was, at least publicly, the front runner for RSC, currently No. 3 on the RER 100 between No. 2 HERC and No. 4 Prime.

"I wish them the best of luck as I do all our competitors," said United chairman and chief executive Brad Jacobs. "We made a proposal, which at the time was $5.50 premium to where the stock was trading. We never got the inside information [from RSC] that would have made us want to raise it."

Had Atlas Copco offered $24 or $25 a share, it is widely assumed that United would have continued a bidding war for RSC. But with United handcuffed by Wall Street's concerns over almighty accretion, Atlas Copco's investment bankers had to assume United could not go much higher than $27 a share, even if it meant finishing second in the RSC sweepstakes and losing its best chance to become the industry's first $3 billion firm by the end of the year.

United, in the meantime, announced the acquisition of 12 rental companies - including Udelson Equipment, No. 30 on the RER 100 - as well as plans to sell $100 million in company stock to affiliates of Apollo Management. In January, Apollo acquired a $300 million position in United.

RSC-Prime The company line out of Sweden is that RSC and Prime will be run separately, with distinct brand identities and management. The question is, for how long?

"This all happened very quickly, and running them separately presents a good opportunity to look at how each company does its business and take the best practices of each rather than try to quickly assimilate," said a source familiar with both companies.

While Atlas Copco may keep the brands separate in an effort not to confuse or alienate customers, it will make sense long term to consolidate certain locations in the South and Gulf Region, where many locations overlap, as well as purchasing and MIS functions.

For now, RSC is happy to focus on the sunny short term. "It's good for our company to have the direction of its future decided," said RSC executive vice president and CFO Rob Wilson. "We are very enthusiastic to have our people getting back to running the best company in the industry."

A closer look at Atlas Copco's bid to acquire Rental Service Corp.

Total price: $1.63 billion

Cash price: $730 million

Assumed Debt: $900 million

Price per share: $29

Multiple: About 6.9 times RSC's trailing

12-month EBITDA

Number of RSC locations: 272

Number of Prime locations: 182

Closing: Expected no later than August