Hertz/Donlen Will Spin Off Equipment Rental Unit To Focus On Cars

Hertz Global Holdings Inc. said it will spin off its equipment-leasing division to focus on renting cars, a move analysts have pushed for since Hertz went public in 2006.

Hertz will separate into two publicly traded companies, with Hertz comprising car rentals and the Donlen fleet leasing business, and the other containing equipment rental operations. Hertz will get cash proceeds of about $2.5 billion from the spinoff to pay down debt and support a new $1 billion share buyback. The spun-off company will be called Hertz Equipment Rental Corp., or HERC.

Hertz shares have lagged behind Avis Budget Group Inc. (CAR), which doesn’t have an equipment-rental unit. Hertz shares rose 76 percent last year, while Avis more than doubled. Through March 17, Hertz had fallen 4.9 percent this year, after a 4.8 percent jump yesterday, while Avis has risen 16 percent.

The separation of HERC will probably be completed by early 2015, the company said. The majority of share repurchases will be done after the separation, and may reach 20 percent of outstanding stock, it said. The separate companies will "benefit from improved financial profiles that include increased earnings stability and higher returns on capital," said Mark P. Frissora, Chairman and Chief Executive Officer.

The car rental business will maintain its target net corporate leverage ratio of 2.5 times to 3.5 times net debt to earnings before interest, taxes, depreciation, and amortization.

Given the debt commitment, Hertz "may opportunistically look to return additional capital to shareholders on an ongoing basis," it said.