Atlas Copco Sells RSC to Ripplewood and Oak Hill

Nov. 1, 2006
STOCKHOLM, Sweden Atlas Copco agreed to sell 85.5 percent of RSC Equipment Rental to private equity firms Ripplewood Holdings and Oak Hill Capital Management

STOCKHOLM, Sweden — Atlas Copco agreed to sell 85.5 percent of RSC Equipment Rental to private equity firms Ripplewood Holdings and Oak Hill Capital Management for about $3.8 billion. Atlas Copco will receive about $3.3 billion in cash and assumed liabilities, plus up to $400 million of additional consideration in the form of notes, based on the achievement of profitability targets through 2008.

According to the terms of the transaction, announced last month, the Stockholm, Sweden-based manufacturer will retain a 14.5-percent stake in the company. Based in Scottsdale, Ariz., RSC is the second-largest equipment rental company in North America, with more than 5,000 employees and more than 450 locations. For the 12-month period ended June 30, the company generated more than $1.5 billion in revenue.

“We are very satisfied with the deal,” said Atlas Copco CEO Gunnar Brock, who said that holding on to the 14.5-percent stake would create a higher value if the company decides to sell out completely later on. “It results in substantial cash proceeds, a capital gain and a minority stake in the best equipment rental company in North America.”

Ripplewood Holdings and Oak Hill Capital will be equal investment partners in the transaction. Both companies have considerable investment expertise in the rental industry. Ripplewood Holdings first invested in the industry in 1998 with its purchase of ICM Equipment Co., which has since merged with Head and Engquist to form H&E Equipment Services. Oak Hill Capital was part of the ownership group that led a buyout of William Scotsman, a rental provider of modular office space, in 1997. Dennis Nayden, managing partner at Oak Hill Capital, is a former CEO and chairman of GE Capital, where he oversaw its large leasing and equipment finance operations.

“RSC fits well within our investment strategy,” said Tim Collins, Ripplewood CEO. “It's a well-positioned company in an industry undergoing significant change, with strong growth prospects.”

Nayden said RSC's processes “have resulted in superior return on capital, which is the key to success in this business.”

Ellen Steck, RSC's vice president of marketing, told RER that CEO Erik Olsson will continue with the company. “We do not foresee any changes to our management structure, including our CEO position, held by Erik Olsson who is a five-year veteran of RSC.”

“We are pleased to welcome Ripplewood and Oak Hill as our new equity partners,” added Olsson. “Both organizations have deep knowledge of the equipment rental sector, and we look forward to their involvement in helping position the company for further growth and prosperity.”

Atlas Copco announced in February that it was exploring a divestment of the business, then valued by analysts at between $3.4 billion and $4.1 billion. The final transaction price was viewed as stronger than some industry analysts expected and one that could have a favorable impact on rental industry valuations. “Rental Service's trailing 12-month EBITDA through June 30 was $663 million, which we calculate equates to a valuation of roughly 5.8 times trailing EBITDA,” wrote UBS Investment Research analyst David Bleustein. “At present, United Rentals is trading at an EV/EBITDA of roughly 4.9 times 2006 estimated EBITDA and 5.3 times trailing 12 months EBITDA through June 30, at a discount to the valuation implied by the Rental Service transaction.”

Other analysts, however, expressed that the price could have been higher. “For a company of the high quality of RSC, I would have thought the value would be closer to seven times EBITDA,” Dan Kaplan, Daniel Kaplan Associates told RER. “RSC has great margins and great equipment, it operates incredibly efficiently, and has EBITDA margins around 40 percent. My expectation is the investors will grow the company, that they need to grow it to maximize its potential.”

Affiliates of Deutsche Bank and Citibank provided the buyers with committed debt financing, which is subject to customary conditions. Debevoise & Plimpton LLP served as legal advisers to Ripplewood Holdings and Oak Hill Capital.

RSC Equipment Rental is No. 2 on the RER 100.