Cover story: The next level
Cover story: The next level
04/06/2012

Mergers and more move rental in new directions

Analysts, forecasters, industry observers and pundits all say business changed forever as a result of the recession that started in 2008. Now, nearly four years later, the equipment rental industry is on the cusp of the kind of transition that can expand the equipment rental concept into more markets, generate new revenue and build rental penetration beyond current expectations.

In short, there is an opportunity for a new golden age of rental to emerge, lifting the industry to greater heights.

The recession caused many in the equipment rental industry to refocus, become lean and mean, increase efficiency and search for new customer segments. In many ways, this environment set the stage for the recent merger of United Rentals, Greenwich, Conn., and RSC Holdings, Scottsdale, Ariz., the two largest equipment rental companies in North America.

Since the merger’s Dec. 16, 2011, announcement, publically traded equipment rental company stock prices have soared. Investors are taking a much more positive view of the industry. Many expect other national or regional players to join forces to follow the lead of United Rentals and RSC.

“The dynamics are all there,” says Dan Kaplan, a rental industry expert and founder of Daniel Kaplan Associates, Morristown, N.J. “Many of the larger rental companies, if they so desire, see exit strategies now. Valuations have increased because of the United Rentals and RSC merger. There is a rising tide lifting all rental companies. The net result is the foundation for the next round of major consolidation. Everything is imminent.”

“Everyone was pondering how the industry would come out of the recession,” says Christine Wehrman, executive vice president and CEO, American Rental Association (ARA), Moline, Ill.

“Few anticipated the news to be so favorable or for the recent developments to occur. This is a very dynamic industry that is here to stay. We have experienced the last 15 years with its ups and downs, and the industry has come out stronger in terms of potential for economic growth. The industry continues to increase the size of the pie or the capacity for rental. There is lots of growth and evolution ahead. It’s an exciting time to be a part of the industry,” she says.

Scott Hazelton, a senior partner with IHS Global Insight, Lexington, Mass., one of the world’s leading forecasting firms, has followed the equipment rental industry for several years through his company’s partnership with the ARA and Rental Management to produce ARA’s Rental Market Monitor™ subscription service for ARA members. He also says more mergers are likely to happen, particularly if the United Rentals and RSC combination lives up to positive expectations.

“I would expect that further mergers and acquisitions will ensue. Such activity tends to come in waves and one would expect that we are at the start of a new wave. Certainly, the United Rentals and RSC merger will lead other large rental firms to evaluate whether they need to react, but more fundamentally, companies are going to investigate where future growth will be coming from and assessing their portfolio in serving those businesses,” Hazelton says.

“For rental to continue to gain market share, it needs to be recognized as serving all conceivable equipment needs. This merger specifically addresses that issue and as customers of the combined United Rentals and RSC learn how completely their needs can be met, this will rebound to the broad positive assessment of the industry’s breadth and capabilities. Indeed, it will likely provoke more mergers and acquisitions activity, which will improve industry efficiency and coverage even more,” he says.

Gary Stansberry, president, The Stansberry Firm, Granbury, Texas, which offers consulting, business valuations and business sale representation services for the rental industry, among others, likens the United Rentals and RSC merger to a cruise ship that makes a lot of noise as it passes the dock and creates a large wake in its aftermath.

“This merger has created a lot of interest and activity. We have had more inquiries from private equity companies and others on the lending side of the business that are now seeing rental as an attractive business,” Stansberry says.

Stansberry, Kaplan and Hazelton are among several who believe the United Rentals merger with RSC will benefit just about everybody in the business, including national and regional competitors, independents and vendors.

“This deal opens an umbrella that lifts everybody. All anybody has to do is follow their lead — increase rental rates, bring more people to rental and just run a good operation,” Kaplan says.

“The merger will grow rental in North America and maybe globally. The financial performance of United Rentals and RSC will be enhanced. They will make more money as a consolidated company by lowering expenses, building revenue and having a bigger product offering. There will be an ability to earn more,” Kaplan says.

“This also can be good for the independent rental company that wants to expand through a cold start or acquisition or wants to expand the fleet,” Stansberry says. “Two years ago, that would not have been a discussion point.”

When United Rentals and RSC combine, the companies say they expect to close or consolidate at least 5 percent of their branches. This, Stansberry says, also can be good news for other rental companies because experienced mechanics, drivers, counter and salespeople, and store managers familiar with rental could be available.

“There’s a pool of talent that an independent can use to fortify its own operation and improve the operation,” he says.

Consolidation has been an uncomfortable topic of discussion for those in the equipment rental industry. Many remember the first wave in the 1990s when a lot of independent rental companies sold to consolidators. Several business owners who didn’t sell were faced with a sudden influx of national competitors in their local markets that were willing to cut
rates to increase cash flow.

In 2012, however, consolidation is different. “You can’t compare the consolidators of 1997 to what is occurring today,” Kaplan says. “Back then, companies were acquired for lots of money, but they were not operationally sound. Analysts were negative. Today, it’s a whole different game. There is professionalism and analysts now are among the rental industry’s biggest supporters. It’s a solid, growing industry.”

The publically traded companies also are focusing on diversifying their businesses so that they are not as dependent on construction, which can be a very cyclical industry. Instead, they are targeting new markets and different customer bases where the potential for rental growth is greater. They also are making niche acquisitions and launching new specialized branches.

For example, Hertz Equipment Rental Co. and its parent, Hertz Corp., Park Ridge, N.J., have purchased a handful of companies to expand its entertainment services division, bringing rental more forcefully into the movie and television production space. United Rentals also has acquired Coble Trench Safety and looks to expand its efforts in this area as well as HVAC, pumps and power. Sunbelt Rentals, Fort Mill, S.C., continues to build its pump and power division with acquisitions and opening new locations.

“I think that we will see rental broaden its footprint in terms of the equipment that it provides,” Hazelton says. “For example, we have seen Hertz acquire assets dedicated to serving the motion picture industry. The challenge for rental equipment companies will be to find industries and/or markets that are either underserved by rental currently or have above average growth opportunity, or ideally both.”

Hazelton, however, warns that this won’t just happen on its own. “Just as the first law of medicine is ‘Do no harm,’ those in the rental industry have to first remember to maintain the service and convenience that has helped build the business to this point. Among other factors, this means ensuring that there is adequate fleet on hand to meet what will become growing customer needs,” he says.

“It also means looking at where strength is going to come from in the near term and be certain that the correct inventory is on hand to meet it. The proliferation of natural gas development will continue, but the very success of past exploration has lowered prices to the point where growth in this area will slow in 2012. However, high oil prices suggest that tight oil activity will continue pace, so firms should be sure to have the necessary equipment in the right places,” Hazelton says.

“Beyond energy, we are seeing a recovery in the automotive market, so rental firms should consider locations near auto and auto part production and assembly plants, and they should consider the correct equipment to have in place to meet growing needs. Transportation equipment will outperform manufacturing in general, although we expect autos, trucks and rail to be stronger than maritime,” he says.

“Also, there are signs of increased consumer spending and industrial inventories are lean. One would expect renewed demand for transportation and warehousing services, so items like materials handlers are likely to see renewed strength,” he says.


Exceeding expectations

While the American Rental Association (ARA) forecast currently is for North American equipment rental revenue — including construction and industrial, general tool, and party and event — to reach more than $53 billion in 2016, there is a chance that growth could be greater as a
result of the dynamics now in play.

Gary Stansberry, president, The Stansberry Firm, Granbury, Texas, which offers consulting, business valuations and business sale representation services for the rental industry, among others, for example, is bullish about the equipment rental industry’s future and wonders if the current forecasts for growth are too conservative.

“The overall economy is recovering, but it’s only a blip or two. Rental is growing faster, but what happens if the economy gets back into a growth mode and rental penetration keeps increasing? There’s a much larger growth potential,” Stansberry says.

“With Tier 4 coming, equipment prices are increasing. Customers of rental businesses have been through tough times and they are asking, ‘Do I really want to spend $70,000, $80,000 or $150,000 on a piece of equipment when I can rent it, have it just in time, pay as a I use it and don’t have to worry about maintenance?’ The concept of rental is getting traction,” he says.

Scott Hazelton, a senior partner with IHS Global Insight, Lexington, Mass., one of the world’s leading forecasting firms, has followed in the equipment rental industry for several years through his company’s partnership with the American Rental Association (ARA) and Rental Management, and he sees potential upside for the industry because of general economic uncertainty.

“In an uncertain environment, companies are reluctant to take on long-term investment as it requires either spending capital that they would rather keep in reserve or taking on debt that they worry about servicing,” Hazelton says.

“Presently, there are short-term uncertainties, such as the construction market recovery and high gasoline prices, and medium term uncertainties, such as fiscal policy and foreign affairs, that lead companies to second guess major purchases. Yet, we have an economy that is improving and firms are winning new contracts for their services. To date, we have seen the equipment needs for these new contracts coming from rental,” he says.

“The pattern of penetration is that the activity tends to increase in the early stages of economic recovery, but then plateau. Certainly, with added confidence, firms tend to add fleet of their own. However, they do not stop renting. As long as rental maintains its historic or even improved level of service and availability of equipment, customers will continue to use rental fleet as a large share of their functional portfolio. This leads to a forecast of rapidly growing rental revenue as the economic recovery takes firm hold. Rental will operate from a larger base than in the last upturn and therefore benefit more directly from the rising tide,” Hazelton says.

The merger of United Rentals and RSC Holdings also has put a positive spotlight on the equipment rental industry.

“United Rentals’ performance and RSC’s performance have been totally consistent and have taken away the investor fear of inconsistent performance. Investors now see the benefits. They look at revenue, fleet size, rental rates and an industry that is growing. All the metric measurements point to incredibly positive results,” says Dan Kaplan, a rental industry expert and founder of Daniel Kaplan Associates, Morristown, N.J.

“We are seeing a higher level of sophistication in the industry with emphasis on metrics so that they can show shareholders that they are managing their businesses proactively,” Stansberry says.

“More independents are realizing they are competing against these sophisticated companies and they are going to start using rental software and track some of these metrics instead of making decisions on fleet without empirical or financial data,” he says.


Manufacturers and the rental business

When considering what might be next for the equipment rental industry besides mergers and acquisitions between rental companies and new startups by those with equipment rental experience, there also is the possibility of manufacturers deciding to participate, although many have long-established distribution networks and wouldn’t want to upset that sales channel.

Dan Kaplan, a rental industry expert and founder of Daniel Kaplan Associates, Morristown, N.J., however, says nothing is off the table as a possibility. “Let’s wait and see what happens. I’m not willing say a manufacturer that is not in the rental business today will not be in it tomorrow. Things are changing rapidly. An international manufacturer could come here and buy a North American rental company for distribution,” he says.

Volvo Rents, Shippensburg, Pa., which is part of Volvo Construction Equipment, last year shifted its strategy and has been buying up independents to build a company-owned network of rental stores instead of its previous Volvo Rents franchise model.

“Volvo is hiring and building a regional management team to cobble this together into a highly polished network. They tried franchising and this new approach will take time, but this way, they do have an advantage as a manufacturer-owned rental company because Volvo can mandate to its own consistency,” Kaplan says.

The Volvo strategy also differs from Caterpillar, which has Cat Rents, a dealer-owned rental company. Some distributors also rent equipment, however, for the time being, other manufacturers have not entered the rent-to-rent arena.