Stockholders of record as of the close of business on the record date of June 22, 2016, will receive shares in Hertz Rental Car Holding Company, Inc. on the June 30, 2016, distribution date at a rate of one share for every five shares currently held. Each current share of Hertz Global Holdings will represent one share of Herc Holdings, but those shares will be adjusted for a 1-for-15 reverse stock split that will be implemented immediately after the separation.
Upon closing, Hertz Rental Car Holding Company will change its name to Hertz Global Holdings and will continue to manage the company’s rental car business. Also upon closing, the current Hertz Global Holdings entity will change its name to Herc Holdings Inc. and operate the equipment rental business.
A lot of wizardry to end up with the rental car business maintaining the Hertz Global Holdings name and the ‘HTZ’ ticker and for Herc Holdings to have that name and a new ‘HRI’ ticker. In short, post spinoff and reverse split, it looks like a shareholder with 15 shares today would end up with 3 shares of new HTZ and 1 share of HRI. A When-Issued market is expected to appear around June 20th for those looking to play around pre transaction.
The new company will be led by Larry Silber and Herb Henkel will serve as Herc’s Non-Executive Chairman. Herc believes it is one of the largest players in the equipment rental space, but it also thinks it only has a 4% market share (by revenue) so there should be plenty of room to grow. Its customer mix has been relatively stable over the past three years (so have its revenues) with the construction and industrial markets comprising of the vast majority of its sales. According to the Form 10, Herc will take on a bunch of debt to transfer ~$1.9b to Hertz as part of the transaction, with the proceeds being used to pay down debt and repurchase shares. While not expected to be too burdensome to the pro forma, it’s worth noting that this business (and its end users’) is highly cyclical. For example, right now, the oil & gas industry comprised 23% of its revenue in 2015, but only 19% so far in 2016.
HTZ is down about 50% since the original spinoff announcement back in 2014, but that was before material weakness in its financials were discovered. I am sure that doesn’t make its large investors, especially the ones who pushed for this transaction, feel very good though. It will be interesting to see what Carl Icahn, whose firm is the company’s largest investor with over 15% of the shares, holds onto post spinoff. Mr. Icahn is expected to purchase some of the notes being offered to finance the transaction and he recently increased his stake in Hertz – his latest 13D filing showed recent purchases of over 1m shares. He certainly seems bullish, but are you following Mr. Icahn’s lead?
Disclosure: Author holds no position in any stock mentioned
This is a really complicated transaction. Am I reading this right?
Parent = HTZ
Child = HCI
HCI takes on 1.9 billion in debt.
HCI gives HTZ 1.9 billion to pay down HTZ debt, and repurchase shares
Or does that mean, which would make much more sense, that HCI takes on 1.9 billion in debt and then uses that debt to repurchase shares and pay down more expensive debt.
TIA
Pardon, HRI.
Yes, it is a complex situation. The Form 10 walks through everything, but yes, in the end, HRI will take on the new $1.9b in debt and pay it to the new HTZ who will use the proceeds to pay down debt and repurchase shares. This paragraph taken from Page 50 in the Form 10 might help:
The following table shows, and the respective footnotes thereto further describe, the cash and cash equivalents and total capitalization of HERC Holdings as of March 31, 2016 on an actual basis and as adjusted to reflect the Pro Forma Transactions, as defined in “Unaudited Pro Forma Condensed Combined Financial Information,” which include the related financing transactions. Despite the fact that New Hertz is being spun off from Hertz Holdings in the Spin-Off and will be the legal spinnee in the transaction, for accounting purposes, due to the relative significance of New Hertz to Hertz Holdings, New Hertz will be considered the spinnor or divesting entity and HERC Holdings will be considered the spinnee or divested entity. As a result, despite the legal form of the transaction, New Hertz will be the “accounting successor” to Hertz Holdings. As such, the historical financial information of New Hertz will reflect the financial information of Hertz Holdings, as if New Hertz spun off HERC Holdings in the Spin-Off. In contrast, the historical financial information of HERC Holdings, including such information presented in this information statement, will reflect the financial information of the equipment rental business of Hertz Holdings as historically operated as part of the consolidated company, as if HERC Holdings were a stand-alone company for all periods presented.
Thanks for the response Spin Doctor.
HERC Holdings (HRI) Equipment Rentals
Capitalization Approx 2.3 Billion (page 50)
Market Cap (42.4 Million Shares x 33) 1.386 Billion
Do you think this differnce reflects the 1.9 billion payout to HTZ?
I’m curious about that $1.9 billion in debt that they are paying to HTZ, do you know if HTZ has to pay HRI back, or is that debt load shouldered exclusively by HRI, and just free money for HTZ, and HRI has to make that back + interest through the regular course of business?
Looks like HRI’s equipment rental business has been on the decline YOY, 7.2%
“Upstream oil and gas market revenue was down approximately 33% as compared to the first quarter of 2015”
However other equipment rental was up about 4%.
So the question I ask is whether the decline in oil & gas is at bottom. According to Baker Hughes it looks like there is a little recover in rig count. http://www.wtrg.com/rotaryrigs.html
So I wonder what Larry Silber is thinking here, taking over what looks like, in Joel Greenblatt’s words, toxic waste. Silber was with Ingersoll Rand for 30 years, so he knows equipment rental.
Barb Brasier is no slouch either, and she she is new to HRI, but she seems to be a very experienced CFO.
What is your opinion of the Grants of Plan Based Awards (page 114)? Do you think that the executives are heavily compensated in options and stock awards or do you think the figures are moderate to low?
With regard to the HTZ’s reverse split that looks like a defensive maneuver to A) Protect the share price so as to not encourage institutional selling if it drops below a certain threshold B) To preserve Executive option exercise prices, unless of course, those prices are adjusted for the split.