In the largest merger in the history of the construction equipment rental industry, United Rentals and RSC Holdings have entered into a definitive merger agreement under which United Rentals — the rental industry’s largest company — will acquire RSC, the industry’s second-largest firm, in a cash-and-stock transaction valued at about $1.9 billion.
United has agreed to acquire RSC for $18.00 per share, a total enterprise value of $4.2 billion, including $2.3 billion of net debt. The boards of directors of both companies have unanimously approved the proposed transaction and recommended that their respective stockholders approve it as well. United Rentals and RSC expect the transaction to close in the first half of 2012.
The acquisition will significantly beef up United’s industrial business, reducing its dependence on the sluggish commercial construction market. Industrial equipment rentals will now form about 35 percent of United Rentals’ revenue, compared with its current percentage of about 16 percent, with commercial construction dropping from about 60 percent of its total revenue to about 50 percent.
The merger is expected to provide a lower cost base and a less volatile revenue profile to better position the company through all phases of the business cycle. The new United Rentals is well-positioned to benefit from increased rental penetration, the continued strength of the industrial sector, serving customers across a variety of industries and a recovery in construction activity. United Rentals and RSC have already begun working on a plan to facilitate a smooth integration of the businesses and realization of more than $200 million of potential cost savings.
“This transaction marks a transformative moment in our company’s history,” said Michael Kneeland, president and CEO of United Rentals. “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, RSC’s CEO and president, said, “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.”
Upon the close of the transaction, three of RSC’s independent directors will receive seats on United Rentals’ existing board of directors. Michael Kneeland, president and CEO of United Rentals, and Jenne Britell, United Rentals’ chairman, will remain in their positions at the combined company.
The dramatic merger, the largest in the industry’s history, provoked immediate reaction in the rental industry.
“I think this merger is terrific for the rental industry,” leading rental industry consultant Dan Kaplan of Daniel Kaplan Associates told RER. “United Rentals is an incredibly and professionally managed company and will set the standard for the industry to follow, operating at a level that other companies have yet to even imagine. United is advancing the rental process and improving its rental rate structure, and is leading the way for the rest of the industry. I think the synergies are far beyond what has been discussed at this point in terms of savings in pricing, SGNA and eliminating overlapping branches. The key is to have more equipment available in a store and this will give them that opportunity.
“The rental industry is still so fragmented. United Rentals has about 7-percent market share; RSC about 4 percent. In contrast, in the car rental industry, Hertz has about 28-percent market share. United Rentals is a New York Stock Exchange company managed by professionals who are dedicated to constantly improving performance and I expect it to continue to improve with this merger.”
Upon the closing of the transaction, each outstanding share of RSC common stock will be converted into the right to receive $10.80 in cash and 0.2783 of a share of United Rentals common stock, subject to the terms and conditions of the merger agreement.
The transaction provides immediate value to RSC stockholders through the cash component, as well as continued participation in future value creation of United Rentals through their ownership of approximately 30 percent of United Rentals on a fully diluted basis. The price of $18.00 per share represents a 58-percent premium over RSC’s closing price as of Dec. 15.
The cash portion of the transaction will be financed through new debt issuance and drawing on current loan facilities. United Rentals has obtained financing commitments from Morgan Stanley Senior Funding Inc., Bank of America Merrill Lynch and Wells Fargo in support of this transaction. By the end of 2012, the combined company’s leverage ratio is expected to be in line with United Rentals’ previously stated target range of 3.5x to 4.5x. As a result, United Rentals expects to retain its current corporate credit ratings. United Rentals intends to repay the outstanding amounts on RSC’s existing senior secured credit facilities and senior secured notes due 2017, and assume all of RSC’s existing unsecured debt.
United Rentals’ board also announced its intention to authorize after closing a stock buyback of up to $200 million of the company’s common stock. United Rentals’ current intention is to complete the stock buyback within six to 12 months after closing.
The deal is expected to be accretive to United Rentals’ cash earnings per share in the first full year after closing. The transaction is anticipated to provide more than $200 million of annual cost savings through the elimination of redundant infrastructure, branches and overhead, two thirds of which are expected to be achievable within the first 12 months following the closing of the transaction. The combination is also expected to provide meaningful revenue synergies from the expanded footprint, in particular with national and industrial account relationships and provide additional cash flow upside through optimization of the combined fleet and capital expenditures.
The proposed transaction is subject to the conditions of delivery of tax opinions and a solvency opinion as well as customary closing conditions, including approval by United Rentals and RSC stockholders, absence of a United Rentals and RSC material adverse effect, and notification and clearance under certain antitrust statutes. Oak Hill Capital Partners has agreed to vote its 33.5 percent shareholding in RSC in favor of the transaction.
Special meetings of the United Rentals’ and RSC’s respective stockholders will be held as soon as practical after the preparation and mailing of the joint proxy statement/prospectus to be included in the registration statement on Form S-4 to be filed by United Rentals to register the shares of United Rentals common stock issuable in connection with the proposed transaction with the Securities and Exchange Commission and the subsequent mailing to United Rentals’ and RSC’s respective stockholders.
Centerview Partners and Morgan Stanley & Co. LLC acted as financial advisors to United Rentals, and Sullivan & Cromwell LLP acted as the company's legal advisor. Barclays Capital and Goldman, Sachs & Co. were lead financial advisors to RSC, and Deutsche Bank also provided financial advice. Paul, Weiss, Rifkind, Wharton & Garrison LLP and Debevoise & Plimpton LLP acted as RSC’s legal advisors.
United Rentals and RSC held an analyst and investor conference call/webcast Friday at 8 a.m. ET to discuss the proposed acquisition. The webcast can be accessed on the investor relations sections on the two companies’ websites www.ur.com/investor and investor.rscrental.com. Interested parties can also listen to the conference call by dialing either (888) 874-9470 in the United States or (973) 935-8772 outside of the U.S., using reference conference ID 36465372.
Headquartered in Greenwich, Conn., United Rentals is No. 1 on the RER 100 with an integrated network of 541 rental locations in 48 states and 10 Canadian provinces. The company's 7,500 employees serve construction and industrial customers, utilities, municipalities, homeowners and others.
RSC Holdings, based in Scottsdale, Ariz., is the holding company for the operating entity RSC Equipment Rental, which is No. 2 on the RER 100. RSC serves the industrial, maintenance and non-residential construction markets with $2.7 billion of equipment at original cost. RSC has an integrated network of 452 branch locations across 42 states in the U.S. and three provinces in Western Canada.