Season 2 Ep 2 – $5.2 Billion Power Play: Herc’s Surprise Acquisition

Kevin Sturmer 0:00
Coming up on Leading the Charge,

Tim Doling 0:02
Huge news in the industry, and one that I don’t think a lot of people saw coming. I’ve spoken to a number of people over the past week, and people really like didn’t see this coming. This is interesting, and I don’t know if that’s because they didn’t expect United rentals let it go, or they just didn’t expect her to do an acquisition like this.

Kevin Sturmer 0:18
This is Leading the Charge where we talk innovation and insights in the industry of sustainable energy, Leading the Charge is brought to you by POWR2, a global provider of energy storage solutions. Let’s simplify sustainability and now from the POWR2 studio and broadcasting everywhere from leadingthecharge.io here are your hosts, Tim Doling and Kevin Sturmer.

Welcome to Leading the Charge where we talk battery, energy storage, insights, innovation and the industry of sustainable energy. My name is Kevin, and I work in the marketing department of a company called POWR2, and with us, as always, is the incredible co founder of POWR2, Tim Doling. He is also the Vice President of Global Markets. How are you doing, Tim?

Tim Doling 1:06
Doing well today. Kevin, thanks for having me. How are you?

Kevin Sturmer 1:08
Doing well, doing well. And for those who caught the first episode of season two here on Leading the Charge, we were talking about United rentals and their acquisition of H & E rentals, which at the time, was one of the largest mergers in rental history. That was January 2025. Cut ahead to a few weeks later, Herc Holdings, Inc. has announced that H & E has terminated that agreement with United rentals, and Herc has now entered a definitive merger agreement with H & E, whereby HERC will now acquire H & E rentals. This is a $5.2 billion deal, 75% in cash, 25% in Herc stock. Joining us to break this all down once again, is Jeff Eisenberg from Claremont Consulting. Thank you for being here. How are you doing, Jeff?

Jeff Eisenberg 2:03
Thanks. Thanks for having me. Exciting times.

Kevin Sturmer 2:06
Absolutely, it’s exciting. Tim, I want to start with you. Let’s get a little bit of background on Herc and why this move was maybe surprising to some people.

Tim Doling 2:21
Yeah, thanks, Kevin. So certainly huge news in the industry, and one that I don’t think a lot of people saw coming. I’ve spoken to a number of people over the past week, and people who really like didn’t see this coming. This is interesting, and I don’t know if that’s because they didn’t expect United rentals let it go, or they just didn’t expect Herc to do an acquisition like this. So for the sake of background, Herc or Herc Equipment Rental Corporation spun off from Hertz car rental back in 2016 so difficult to believe th at’s almost 10 years ago. They spun off from car rental, and then they actually floated as a public company themselves about six to eight months later, headed up by Larry Silber. And interestingly, their strategy has not really been through acquisition to grow, but rather to just grow organically. And so you look back at public statements that Larry made, both in shareholder conferences and also on an interview he did with Engineering News Record in 2016 where he was actually asked point blank, is growth going to be done organically, or are you looking to make acquisitions? And he said at that point, it’s going to be done organically. As far as acquisitions, we believe we already have an amazing footprint of 270 locations in North America, over 280 around the world. All of these are purpose built locations that hertz has built over the last 50 years. The company had a few minor acquisitions over the years, but it wasn’t built on an acquisition strategy. So they were looking to build on what had worked for them previously, which was that organic growth in the various markets that they did well in. So I think that’s pretty much why people were so surprised that this huge acquisition came. In fact, I think it’s the biggest rental acquisition in history. Is that correct? Jeff,

Jeff Eisenberg 4:02
I think it’s the biggest in rental acquisition in history. I think the even when United was offering to buy Head & Engquist not that many weeks ago, that was already going to be the biggest acquisition in the history of the rental industry. In fact, this acquisition is bigger than the rental industry in most countries in the world.

Tim Doling 4:21
That’s just crazy. So let’s go over the numbers again. The acquisition amount was 5.2 billion. Was it?

Jeff Eisenberg 4:28
That’s it. 5.2 billion, 75% of that is going to be in cash, and 25% is going to be in Herc stock, which has performed really well over the last year and the last few years, as as as it’s come out of the recession. But both well, both United and Herc’s share price has gone up. It’s performed very well. So it’s a it’s this. Will talk about this later as well. This is also a bet on the US economy.

Tim Doling 4:53
Yeah, I was going to ask about that. So two quick follow up questions. The first on, how are her actually going to fund this 75% cash as a fair chart? Good cash to come out of any budget. So where does that come from? And secondly, this shows a huge amount of confidence in the economy going forward, especially here in the States, which is where H & E is. Well, I think they’re only located in the States. I think they’re in Canada. So it shows some confidence in the market. And also a pretty good multiple of EBITDA for that company.

Jeff Eisenberg 5:19
Yeah, we’ll talk about, we should talk about the multiple as well, because that’s an important detail. Because the price is higher. The price that Herc is offering is half a billion dollars more than the United Rental’s price, which was already well, the multiples were reasonably high, but not frighteningly high, as sometimes United, for example, has paid for specialty rental businesses. So where the EBITDA multiples are sometimes 5, 6, 7, starts to for a general rental company, starts to feel pretty high. But for a specialty rental, or temporary accommodation rental, the multiples can get up to 8, 9, 10, even higher sometimes. It depends on what the profitability possibilities are of the acquired company and what everybody’s optimism is about the markets that these people, these companies work in.

Tim Doling 6:14
Yeah, that’s interesting. But H & E is not typically a specialty business, as it is more general rental and aerial. So it’s, it’s interesting that the multiple they’ve commanded is that much, and also Herc are paying a 14% premium on what United Rentals had previously offered. So it goes back to the confidence in the market. But again, where does the company fund this from?

Jeff Eisenberg 6:36
Well, Herc, has the facilities is already in place. They have enough banking bank lines to do this. I don’t know if they’ve said explicitly or implicitly that instead of they may buy a little bit less equipment over the next few years and just digest Head & Engquist. Because Head & Engquist has got quite a lot of equipment. It’s got almost $3 billion of equipment, original cost, which is, I think that’s more than Herc would spend in a typical year anyway. So, but some of the value that both United and Herc are saying that the reason the imperatives behind doing this are it’s the synergies. What can you save in the saved overheads of the combined company? Only one finance department. You can, you’ve got some overlap of depots, and they can, they can work better together, or you can consolidate. That’s, that’s, that’s one of the synergies. The other one is the, is the revenue synergies. If Head & Engquist is a generalist and it’s got four major categories. But Herc has got a huge amount of different things that it rents. Does a lot of specialty business, it’s in the pumping business. It’s in the film and television business in a big way. They do lots of different things. So they’ve got a they’ve got a bigger catalog to sell to the to the Head & Engquist customer base. United Rentals said they were gonna save $130 million in costs and $120 million in, they were gonna get $120 million of extra revenue synergy. The total Herc proposal is to take that up to $300 million in synergy. So Herc says they can squeeze another $50 million a year out of the extra synergies in this. So it’s a big push. Now, United has been acquiring companies for for years. That’s, that’s how it was formed, that’s in its that’s, that’s, that’s what it’s done since the first day of its existence, and United has acquired over 200 companies over the last 20 something years. So United is really good at digesting and integrating companies, great systems and everything else. While Herc has grown more organically over the last 50 years, it’s a lot older company. When there were no big rental companies, there was Herc.

Tim Doling 8:52
Yeah, and this is just going to further cement their position, especially in the US market. How often do these sort of things happen? Like I’ve never heard of a acquisition being agreed, and then somebody else swooping in and taking it over. Does it? Does it often happen?

Jeff Eisenberg 9:06
A couple things come to mind. There was a bidding war for the lavender group in Europe. But that must have been, must something like 10 years ago, and it finally went to Loxam. So it doesn’t happen so often. So this is a, it’s a surprise. I was a, I would have, I would have bet against it happening, because it’s also, there’s not that many rental companies that are big enough to handle this in the world. So it’s, it’s a pretty big you think of a, think of a large snake eating a very big mammal. It’s going to take a while to digest this. This is a, remember the if Hercs Total fleet? Well, the combined company’s total fleet is something like ten billion the goodwill item, which is the amount of excess paid over the metal in the acquisition, it’s going to be something like $1.5 billion so this is actually a big piece of Hercs total asset base. Now the if they, if they’re, if they’re right, and the economy continues to go reasonably well, and they, and they do their and they get the synergies and the and everybody, and then it will make sense. And I don’t think this is the last big acquisition we’re going to see.

Tim Doling 10:18
No, I fully agree. So what? Just to finish on that point then – so Matt Flannery has made the statement that they’re not going to pursue it, so they’re not going to counter offer or go after it, so it looks like it’s going to be a done deal. So what do United rentals do next?

Jeff Eisenberg 10:33
United Rentals continues to acquire companies. They, they they acquire. That’s what they do. That’s the the people that set up United rentals, Brad Jacobs and team back in the late 1990s that’s what they did, and that’s what that’s how they started. So that’s they’re going to continue to acquire integrate. And United has started to do things outside the United States too. They are. They do rental in Australia. They do some, some amount of dozens of depots around Europe. We will, we’ll, we’ll, sooner or later, they’ll be a global company as well, and that’ll. Part of that may depend on what the opportunities are in the United States, because United States has had such a run over the last 10 years. The growth rates been incredible. One of the things about the United States rental market over the last 10 years is that the rental prices have had some inflation to keep going along with the costs. While in Europe, a lot of these markets have had relatively steady rental rates kept up, kept kept flat or even going down because of intense competition, but the costs have continued to go up, energy, equipment, personnel, but the United States has continued to thrive, and margins have been, remained excellent, in some cases, even gotten better.

Tim Doling 11:51
Yeah, I just got back from the UK, where you obviously are, and they just can’t believe the rental rates that are still being commanded in the US compared to what they’re getting in the UK. It’s just pretty insane. So it’s obviously an attractive market for a lot of people.

Jeff Eisenberg 12:05
Now, Herc reports on that. If you take a look through their investor presentations, they do say that they do quantify how much their rental pricing has gone up, but it’s usually somewhere between 5, 6, 7, or 8% something like that. And that’s but compounded over five years is excellent. And the Europeans, UK rental companies, French and the Germans, would love to see that kind of improvement every year, because everybody’s costs are going up.

Tim Doling 12:28
Yeah, it’s just looking at some of this, some of the slides from their investor presentation, and that their growth and earnings just doing extremely well.

Jeff Eisenberg 12:37
Yeah, although the utilization for Herc and for Head & Engquist has been kind of steady, I think, for Head & Engquist over the last 12 months, I think the utilization went down a little bit, but the rental rates came up a bit. So it’s a good, steady business producing a lot of cash. So a lot of these rental companies, a lot of the big four in the United States, produce excellent amount of cash. So the debts been coming down steadily, even as they build fleet. Companies like United Rentals have been repurchasing its own shares, so they’ve been giving money back to investors that way. And the amount of extra cash that the rental company has been producing is billions of dollars. It’s a lucrative industry, while the Europeans continue to invest in equipment, but they’re not paying the amounts of dividends, and they’re not paying down the debt at the rate that the US companies are

Kevin Sturmer 13:29
So I want to go back to the original deal. We’re a few weeks out from when that was announced. By now, a lot of wheels were probably in motion. So the question Jeff, I’m curious, what does it take to put the brakes on that deal and shift into a new direction? What are the costs involved? Basically, what was already happening,

Jeff Eisenberg 13:51
The fees that you run up with between due diligence, financial analysis, bankers, analysts, stock brokers, uh, lawyers, everybody doing the real estate. It’s 10s of millions of dollars. So it’s a very you’ve got, you’ve had a lot of people working day and night to do all kinds of analysis for this, just because it’s so large. But remember, at for four or $5 billion acquisition, 1% of that is already $40 – $50 million so it’s a it’s the money, the money, the numbers are. The numbers are very big, very quickly. Now, remember, I don’t think there’s a single human being that has visited every United rentals depot, because something, there’s over 1500 of them. I’m pretty sure that no single person has visited every Herc depot, either. But it’s more possible that it happens, but it’s probably the case that maybe somebody that’s visited every Head & Engquist, because not quite so many of them. So these businesses are absolutely enormous in scale, so the companies that have done a phenomenal job to keep systems and controls in place to make these businesses continue to be efficient and. At that size, but all the this, but the size helps a lot too. It’s a it’s the if you become somebody’s biggest customer, one of the biggest customers in the world, you’ve got great you’ve got great negotiating power with suppliers. You’ve got a lot of footprint. You can move incredible amounts of equipment, east, west, north, south, within the United States, so and in and out of Canada as to follow the work.

So, as we do with every episode, we end by answering a question or two from the audience, and if you have a question for us, send an email to Leading the Charge at power two.com This was somewhat of an unexpected episode, so we’re gonna ask a question. But let’s, let’s try to zoom out a bit and sum up what is happening here. So what is the impact of this merger on the rental industry, in terms of the US, and then also, on a global scale.

Some equipment doesn’t travel across borders. There’s CE mark specific equipment for for Europe, while ANSI spec for the US, tier four diesel engines, tier four, final diesel engines, versus stage five in Europe. That said, if you have a big lithium battery from POWR2 that could be more of a global product. So as things evolve, maybe some of these products will move around the world a little bit a little a little bit more easily. So because the equipment doesn’t move quite so easily, it may be more, these rental companies will have to do something slightly different in some of these other countries, and they can’t necessarily supply the whole globe with exactly the same equipment, but the globalization of that industry is it’s on its way to happening in general rental there’s not very much of it. Even Sunbelt does business, a significant amount of business that the biggest rental company in the UK and then number two in the US, but I don’t think very much equipment moves back and forth between them, and the businesses are quite different, and the profitability levels are quite different. So I think it’ll take either a downturn in the US to make some of these other markets look more interesting, or increased profitability in Europe to be more desirable for companies like the United, who have an incredible business with excellent returns and good cash flow in the US.

Tim Doling 17:29
Yeah, you mentioned earlier about United rentals, doing some small acquisitions in Europe. Is there anyone in Europe that if they were looking just purely at scale? Is there somebody in Europe you think they would go after just to get the footprint, there used

Jeff Eisenberg 17:42
to be two. There used to be two excellent rental companies, still are excellent rental companies, in Scandinavia, and both of them were traded on the Finnish stock market, Cramo and Ramirent. Both of them have been taken, been acquired by European private rental companies by one by Loxam and one by Boels. So you would have to negotiate with with a privately owned company to do that, rather than make an approach for a stock market traded company. Most European countries do not have any rental companies traded on the stock market. The United Kingdom has a few, but some of them are performing well, and some of them are under pressure, partly due to this intense competition.

Interesting. So you got Loxam, which is probably the largest in Europe, isn’t it about $2.3 billion of revenue, and then Boels at about $1.5 billion, somewhere around there. So even in even though they’re huge companies in Europe, still nowhere near the size of United Rentals.

Nowhere near the size of United Rentals. And I think that generally, the profitability is a bit lower. Certainly, EBITDA as a proportion of revenue is lower. Kiloutou in France performs well. I think it’s a bit more profitable than some of the other big ones. But, and now that’s a family office private equity owned too. So we’ll have to see what happened. I wouldn’t be too surprised if five years from now, either Sunbelt or Herc or United rentals bought one of the three big Europeans, possibly all three of them will change hands. But while the United States is continuing to motor forward, it remains a very low risk proposition, even to pay a relatively high multiple for another rental company in the US, rather than going to Europe, where you can’t necessarily fall back and take your equipment to from the US to the to Europe or the UK. It remains an optimistic moment for and it’s a big bet by first by United and then by Herc and its investors, that the US economy will continue to do well, and that the rental industry will do well too.

Kevin Sturmer 19:43
Exactly. Something to keep our eyes on and something to keep your eyes on is whatever platform you’re on, hit the like button, hit the subscribe button. Do all of those wonderful good things, leave a review that helps us out a lot. You can find more information in the show notes, some links. You can also find a link to connect with Jeff, and you can also visit leadingthecharge.io. Our legal team wants me to say that any statements or views expressed by the hosts or guests on Leading the Charge are entirely their own and do not necessarily reflect the opinions or positions of POWR2 their partners or affiliates. And finally, a big thank you to Jeff and to Tim. Wonderful insights today. Thanks very

Jeff Eisenberg 20:30
much for having me.

Tim Doling 20:31
Thank you

Kevin Sturmer 20:31
And thank you to you. We know your time is valuable. It’s one of the greatest gifts we have in the world, and we appreciate you spending a little bit of your time with us today. So let’s simplify sustainability and keep Leading the Charge toward a world powered by sustainable energy. See you next time.