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When a company is really determined to acquire another, there are two usually foolproof strategies for getting a bid over the line. Offer a blowout premium, and then do it in cash.
Neither has worked for United Rentals, the $60bn juggernaut of the equipment rental world. Its all-cash proposal to buy rival H&E at an enterprise value of nearly $5bn — implying a premium of more than 100 per cent to the target’s undisturbed share price — was gazumped this week by smaller rival Herc Holdings, which swooped in with $5.3bn and carried off the prize.
Three things explain this high-stakes tussle. The first is low valuations. Even Herc’s bid, with its massive premium, values H&E at a modest eight times annual ebitda. The second is that renting equipment is a growing business. Construction companies have increasingly moved to “asset-light” models, where they don’t need to own their own bulldozers but rather rent them out for specific jobs.
And the third is that the equipment rental sector — which includes products such as aerial work platforms, power generation units and storage sheds — remains fragmented with companies specialising in different types of machinery or geographies.
That has created fertile hunting grounds for would-be consolidators. United Rentals itself has grown through a constant stream of acquisitions, completed over decades. Herc, whose enterprise value is $11bn and was spun out nearly a decade ago from car rental company Hertz, has been making its own big play to become a consolidator. Its shares are up more than 500 per cent since their 2016 debut.
For an idea of the synergy potential, just think that H&E has annual standalone ebitda of $700mn. Herc predicated its bid on eventually capturing a juicy $300mn of extra pre-tax profit. Nearly half derives from more uncertain revenue gains through offering customers of both companies a broader selection of rental equipment. These should have a present value of about $2bn, in line with the premium offered.
Given what a big bite H&E is, a quarter of the consideration Herc offered its shareholders comes in the form of stock. Shame, then, that Herc shares fell nearly a tenth on Tuesday after the deal was announced, perhaps indicating some investor discomfort with those synergy estimates.
Still this sector is about making big M&A bets and then executing on the integration. Chunky deals do not come along very often and Herc has clearly decided that H&E was worth paying a valuation well above its own. It will need to cross-sell a lot of forklifts for its big bet to come good.
sujeet.indap@ft.com
