Good morning, everyone, and welcome to the Herc Holdings Investor conference call. At this time, all participants are in a listen-only mode. A question-and-answer session will follow the formal presentation. Please note that this event is being recorded. I would now like to turn the conference call over to Leslie Hunziker, Senior Vice President, Investor Relations. Please go ahead.
Thank you, and good morning, everyone. We appreciate you joining us on today's investor call to discuss Herc Holdings' proposal to acquire H&E Equipment Services. With me are Larry Silber, President and Chief Executive Officer, Mark Humphrey, Senior Vice President and Chief Financial Officer, and Aaron Birnbaum, Senior Vice President and Chief Operating Officer. You may obtain a copy of this press release regarding our announcement and the associated presentation on our website at ir.hercrentals.com. This call is being webcast live, and a replay will be available on the Events and Presentations tab on the Investor Relations section of our website. Before we begin, I want to draw your attention to the forward-looking statements and additional legal information which are available on slide two of the presentation. As a reminder, today's conference call contains certain projections and other forward-looking statements.
These statements are subject to risks and uncertainties that may cause actual results to differ materially from those expressed or implied in these statements and are more fully described in our cautionary statement regarding forward-looking statements in our presentation. At the end of the prepared remarks, we will conduct a question-and-answer session. We ask that you limit yourself to one question. I'll now turn the call over to Larry Silber, Herc's President and Chief Executive Officer. Larry.
Thank you, Leslie, and good morning, everyone. We appreciate the opportunity to talk with you today about Herc's proposal to acquire H&E Equipment Services. Mark and I will take you through the presentation, and Aaron will join us for Q&A. I'll begin on slide three. Since becoming an independent public company in 2016, we have significantly increased Herc's scale and geographic reach through greenfield development and strategic acquisitions. This acquisition will accelerate our strategy in meaningful ways and enable Herc to continue delivering market-leading growth and superior value creation. The strategic and financial benefits from the transaction are compelling. With H&E, we gain a high-quality rental business that has invested strategically in its fleet and branch network consistently over the last several years. Together, we will have a substantially expanded footprint, increased density in key regions with economies of scale, geographic and customer diversification, and a larger and younger fleet.
In addition to these strategic benefits, the financial benefits create significant value. The transaction is expected to be high single-digit accretive to Herc's cash EPS in 2026 and ramp to greater than 20% as synergies are fully realized. We will achieve a return on invested capital that exceeds the cost of capital within three years. As we will detail shortly, the cost and revenue synergies are substantial and highly achievable. We believe the power of our platform and the pro forma financial profile should support a higher trading multiple for the combined company. It is important to note that the transaction consideration mix has been structured to ensure that we continue to have the financial strength and flexibility necessary to make investments in the business and to support Herc's dividend, which will be maintained.
We plan to refinance all of H&E's existing debt and will fund the cash consideration of the transaction with a combination of $4.5 billion in newly issued debt and availability under Herc's ABL prior to closing. At the close, the pro forma net leverage for the company will be 3.8 times prior to synergy realization. We expect this to be reduced to below 3.0 times and be in Herc's targeted range within 24 months of closing. H&E is a company we know well. We have great respect for their team and look forward to building on our combined 120+ years of industry experience and shared priorities of excellence in customer service and safety to create benefits for the shareholders, employees, and customers of both companies.
Now, turning to slide number four, not only is this transaction good for Herc's shareholders, it will provide H&E shareholders with immediate premium value, upside opportunity, and a clear path to close. In fact, this morning, H&E announced that its board of directors has determined that Herc's cash and stock merger is superior to the $92 per share cash sale to United Rentals. H&E has notified United Rentals that it intends to terminate its merger agreement and enter into a merger agreement with Herc. United Rentals notified H&E in writing that it does not intend to submit a revised proposal and has waived its four business-day match period under the United Rentals merger agreement. Accordingly, we expect to finalize and enter into our definitive agreement with H&E in short order.
Under the terms of our proposal, H&E shareholders would receive $78.75 in cash and 0.1287 shares of Herc Common Stock for each share they own, with a total value of $104.89 per share based on Herc's 10-day VWAP as of market close February 14, 2025. Following the close of the transaction, H&E shareholders would own approximately 14.1% of the combined company. Our proposal represents a 14.0% premium to United Rentals' $92 per share cash-capped consideration. Our proposal also enables H&E shareholders to share in the value created from the $300 million EBITDA synergies expected to be generated by the end of year three following close and an anticipated improved valuation multiple for the combined company. We provide further detail on the breakdown of the expected revenue and cost synergies later on this call.
Upon termination of H&E's existing agreement with United Rentals and the execution of a definitive merger agreement between Herc and H&E, Herc intends to commence a tender offer to acquire all of the outstanding shares of H&E Common Stock for a per share value of $78.75 in cash and 0.1287 shares of Herc Common Stock. Following completion of the tender offer, we will acquire all remaining shares not tendered in the offer through a second-step merger at the same price as in the tender offer. The transaction is expected to close mid-year 2025, subject to the majority of H&E shares being tendered into the offer and receipt of customary regulatory approvals and closing conditions. Now, turning to slide five, we are pursuing the proposed combination with H&E from a position of strength. Execution on our five-pronged strategy has resulted in industry-leading growth and superior value creation.
Indeed, we have delivered a total shareholder return of 544% since we became an independent public company in 2016. Underpinning these results has been our disciplined capital allocation strategy, including through M&A. Over the last four years, we have invested more than $2 billion in over 50 acquisitions. These acquisitions have allowed customer demand, grow local account revenue, cross-sell specialty solutions, elevate national account capabilities, and enhance our ability to capitalize on high-value project opportunities. Herc today is a partner of choice for local and national accounts across North America, and the combination would accelerate our strategy and the results it delivers for our shareholders. Now, turning to slide number six, H&E has built a high-quality platform with talented employees and a young, premium-branded fleet. They have an attractive footprint that spans many high-growth regions, including the Gulf Coast, Southeast, Mid-Atlantic, Midwest, Southwest, and Western states.
Now, turning to slide seven, you can see that their footprint is very complementary to our own. In addition to an expanded footprint, Herc gains increased density in key regions and enhanced geographic diversification. The acquisition would strengthen Herc's position as the third-largest rental company in North America. The combined company will have a leading presence in 11 of the top 20 rental regions and increased urban density in 7 of the top 10 rental regions. Together, we would operate more than 600 branches with a fleet original equipment cost, or OEC, of approximately $10 billion at the time of closing. I'll now hand it over to Mark to further discuss the synergy opportunities we expect to achieve through the proposed transaction. Mark?
Thanks, Larry. Beginning on slide eight, I'll highlight that the synergy upside enabled by the combination is substantial. We have identified approximately $300 million of incremental EBITDA upside, including approximately $125 million of cost synergies and approximately $175 million EBITDA impact from revenue synergies. In evaluating these opportunities, we brought to bear our M&A experience over the past five years and believe a significant amount of these cost synergies are highly achievable within two years and revenue synergies achievable within three years after the transaction closes. The cost savings are driven largely by consolidating corporate functions, the elimination of duplicative administrative costs, and the benefits of scale across our operations, including with respect to facilities, maintenance, and operating overhead. A smaller portion of the savings will come from the implementation of initiatives currently being deployed at Herc.
The revenue synergies are weighted towards opportunities we see to leverage our specialty fleet. In addition, we have revenue synergies coming from our general rental program and how we structure our customer offerings. The revenue synergies are expected to drive higher free cash flow conversion given that our EBITDA margin flow-through will be meaningfully higher than existing margins with relatively lower capital to achieve that EBITDA. Incorporating the impact of 10% dis-synergies, revenue synergies should reach approximately $240 million. Let me provide more detail about the revenue synergies so you understand the power of their value creation. Turning to slide nine, Herc's expertise in selling specialty rental solutions is a differentiator for us, and we have a broad offering. Currently, $1.6 billion of our OEC is specialty fleet that is offered in approximately 155 locations, or about a third of our market footprint.
Additionally, we have been successful in integrating our specialty fleet across our acquired general rental customer base, supporting higher margins and improving returns. Specialty solutions generate greater than 800 basis points higher profit margin than general rental on average. On fully integrated acquisitions, we have achieved our target synergized multiple. H&E's offering is predominantly general rental, which provides a substantial cross-selling white space where we can bring our specialty fleet and expertise in rental solutions to their customers. Turning to the general rental opportunities on slide 10, as noted earlier, the combined company will have more than 600 locations at closing. Herc today offers 10 times more category classes, including electric and hybrid equipment options and technology-enabled rental products and solutions. Herc's product breadth, combined with H&E's expanded local location network, propels a larger share of wallet across all customer accounts.
Moving to slide 11, we have long talked about Herc's technology and how our digital tools are helping to drive revenues. This includes Herc's proprietary rental system, which has applications such as ProControl, Optimus, and On the Go. We also have customized business intelligence tools built with Salesforce, telematics, and Qlik. With a more innovative platform and our market-leading sales strategies, we believe we provide more value to H&E's customer base. With the strategic and financial benefits of the proposed transactions, we believe there should be a significant opportunity for a re-rating of Herc, as illustrated on slide 12. Together, we will have an even more powerful value creation platform that outpaces market growth, enhanced free cash flow generation, and greater investor interest that comes with a scaled company.
With these factors, we believe that the combined company should trade at a higher multiple that is more consistent with comparable company valuation multiples in our sector. These synergies have high free cash flow conversion. Incremental run- rate CapEx represents only 14% of incremental EBITDA and a discounted cash flow of approximately $3 billion. As shown on the chart on the right-hand side, this uplift from our re-rated opportunity delivers significant additional value to Herc and H&E shareholders. For each incremental half-turn re-rating, the implied value of Herc would be approximately $40 per share, or an approximate 20% increase to our stock price compared to where we are today. I will now hand the call back to Larry to close our prepared remarks. Larry?
Thanks, Mark, and I'll now close on slide number 13. To recap, this is a highly compelling acquisition that would deliver significant strategic and financial benefits. Together, we would have an expanded footprint across the United States, increased density in key regions, enhanced geographic and customer diversification, and a larger, younger fleet. We would also have significant synergies and a re-rated opportunity, which would provide substantial upside for both Herc and H&E shareholders. The transaction would be high single-digit accretive to Herc's cash EPS in 2026 and ramp to greater than 20% as synergies are fully realized. In addition, ROIC is expected to be in excess of the cost of capital within three years of closing. The combined entity would be capitalized to maintain financial strength and flexibility. We believe a combination with H&E would create benefits for shareholders, employees, and customers.
We are excited about all of the opportunities ahead. We'd like to thank all of you for taking time to join us this morning, and with that, we'll open the call for questions. Operator?
Thank you. We will now begin the question-and-answer session. If you would like to ask a question, please press star one in your telephone keypad to raise your hand and join the queue. If you would like to withdraw your question, simply press star one again. We ask that you please limit yourself to one question only. Your first question comes from the line of Jerry Revich from Goldman Sachs. Your line is open.
Good morning, Jerry.
Good morning, everyone.
Good morning,
Larry. Larry, Mark, Aaron, good morning. I'm wondering if you could just talk about the size of the cross-sell opportunity. You folks laid out a pretty large number compared to the number that United Rentals laid out. Can you just flesh that out a bit? And separately, back at your analyst day, you folks had spoken about significant margin improvement where you have high density of branches. How much of the H&E footprint will benefit you folks to drive higher route density as we look at potential for additional cost upside relative to what you folks laid out?
Yeah, look, let me start by saying we've been looking at H&E for a long time. We know the company very well, and we believe this is a great opportunity for us, Jerry. And I think we've been asked the questions many times, "Would this be something that we'd be interested in?" And obviously, we are. I think what you're looking at is something that I'm going to ask both Mark and Aaron to comment on. Mark on the first part and Aaron on the second part.
Yeah, I think that, Jerry, when you think about sort of the 240, which is the rev synergy target, right, one of the big differences or differentiations in that number is we're sort of assuming a 10% dis-synergy in that. And I think that when we took the time to sort of get inside of the crossover from a customer perspective and then sort of evaluating and aligning that to the fleet, we saw significant opportunity both from a gen rents perspective as well as a specialty perspective. And on top of that, we actually think we can do it relatively capital light to generate that ultimately $300 million of synergy. So you've got a flow-through assumption there of about 70% on that 240 and significant cash generative characteristics to that synergy profile.
And, Jerry, I would just add, when we look at our business and what we've done since we went public over the last nine years and what our business looks like today and the value and the margin we've created by using our specialty products and the breadth of our products to kind of drive the business, we believe, on the existing footprint for H&E. That's some of the metrics we use to evaluate where we're going to go with our synergies. And I think your second question was about, "Is there some savings in the location footprint?" We have to get into that. We put some assumptions in the model for that. And you might have situations where an H&E location is very close to a Herc location, maybe a couple of miles, where there might be some redundancy.
But the fact of the matter is, when you look at our position in the industry and the share we have and what our opportunities are to grow share in the market, there's not going to be a ton of redundancies with fleet and capability to grow the share. And I think we have a great opportunity to repurpose other properties, either on the Herc side or then the H&E side with our specialty and our product breadth that we do today in Herc that will probably give us a quicker pace to kind of synergize this opportunity.
Yeah, and remember, Jerry, that as we cross-sell with specialty, it provides about 800 basis points of higher margin for us versus general rent.
Your next question comes from the line of Tami Zakaria from JPMorgan. Your line is open.
Hi, good morning. Thank you so much.
Morning, Jerry.
Morning. So my first question is, I think you mentioned $240 million revenue synergies, $175 million EBITDA synergies. So that is almost an incremental margin of over 70%.
That's right.
Am I looking at it the right way? And if so, what would drive such high incrementals from these?
Yeah, great question. I think sort of the start there is the footprint that we're going to be able to sell into is there, and so then you're really just looking at the variable cost structure on that incremental dollar of revenue.
So basically, location is the reason why incremental is really so high because you don't have to incur additional variable expenses.
That's right. I mean, the fixed cost structure, you're just leveraging that fixed cost structure and driving revenue through it on a variable basis only.
Your next question comes from the line of Steven Ramsey from Thompson Research Group. Your line is open.
Hi, good morning.
Hi. On the revenue synergy, it looks pretty equally split between the value-add, the gen rent, and the specialty. Do you expect one of these components could have more ultimate upside benefits? And then secondly, do you expect one of these components, you could see the benefits sooner than another?
The general rent side is probably the one that we'll be able to realize the quickest because of the breadth of products that we have. The specialty side, as Larry illustrated, has a higher margin profile. So it's more of a premium 800 basis points of margin improvement. That'll take us to kind of move into the platform, the Salesforce, the customer base, and with CapEx. So we might get some efficiencies, most likely, with our overall CapEx, but some of that will be redeployed towards the specialty side so that we can penetrate that. And that'll just take some maneuvering. So the gen rent is probably kind of the easiest one, I'd say, to capitalize on, and the specialty will follow right behind that.
But overall, on the upside, specialty overall could become a bigger part of that bar chart as we get into the third year, I would say.
Your next question comes from the line of Ken Newman from KeyBanc Capital Markets. Your line is open.
Hey, good morning, guys. Congrats on the deal.
Morning, Ken.
For my question, now with the OEC at about, I think, $10 billion pro forma, I'm curious, Mark, you talked about this being a CapEx-light type of acquisition on the revenue synergy side. Do you think now that you've reached this scale, you can grow the fleet and still be free cash flow positive going through the cycles similar to your larger competitors like United?
Yeah, I think that runs to the entry comments by Larry in, right? I mean, I think it certainly accelerates our strategy and puts us at a good stratosphere in terms of cash generation. The synergy component of this is extremely compelling. I think when you think about just the synergy component of this on a discounted cash flow basis all in, it's worth up to $3 billion on its own. And so I think compelling and certainly accelerating our strategy, Ken.
Your next question comes from the line of Mig Dobre from Baird. Your line is open.
Hey, good morning, guys. It's Joe Grabowski for Mig Dobre this morning.
Morning.
Good morning.
Good morning. Good morning. I was wondering if you could give us an idea of what the interest rate will be on the new $4.5 billion of debt and maybe an estimate for the incremental annual interest expense from the transaction?
Yeah, I think from a modeling perspective, it will probably be somewhere in the early 6-ish range, depending upon the structure that ultimately comes to bear. But as Larry said, we're looking at this as probably some element of unsecured as well as secured debt. So around that incremental debt carry at somewhere in the early to mid 6-ish.
Your next question comes from the line of Neil Tyler from Redburn Atlantic. Your line is open.
Hey, good morning, guys.
Hi, Larry.
Good morning. A couple along the revenue synergy line again, please. Firstly, of the 155 specialty branches, have you got an idea of sort of what proportion of those broadly sit within reach of the H&E customer network? And then secondly, on the value-add, what other sort of challenges or sort of obstacles or softer factors we need to think about when you're talking about rolling out those proprietary systems and intelligence tools across the network? How easy is that as a task to do to extract those value-added offerings? Thank you.
Yeah, to answer the first part of the question, as you know, you could tell from the material. H&E's got a big, strong footprint along the Gulf area in the Southeast, is what I would say. Some big markets in Florida, Dallas, and Houston, through Louisiana. And our specialty business is really mature through those areas. So I think we'll be able to capture that pretty quickly. The 150 branches, those are some of the larger markets in the U.S. So we have all of our specialty kind of operations and the breadth of all of our fleet in those big markets because our strategy has always been to go develop that in the top 30 markets of North America first. So I think you're going to see a lot of that opportunity down in the markets where they have kind of a larger footprint. So that's a real positive.
And the network effect of that will be a powerful thing, I believe. The second part of your question was about the platforms and the systems. Of the 50 acquisitions we've done over the last four years, we turn the lights on day one. So whether it's our back office, RentalMan, or our apps, wires, training, sales training, branch training. But we'll work with that, with our IT team and our integration team to make sure we get some of those things embedded right away, and others might be followed quickly.
Your next question comes from Brian Sponheimer from Gabelli. Your line is open.
Hi, Brian.
Good morning, everyone, and congratulations. I'm just curious, was there any issue with HSR and URI that allowed you all to come in here?
Honestly, I don't know the answer to that, Brian. I think that's probably something better to ask the other side, but we haven't heard of anything.
And as far as any thoughts on the antitrust and your footprint and overlap, any branch closures that you potentially expect? Any issues there that are items to work through?
Yeah, well, from an HSR standpoint, I don't expect that, but we provide a deal certainty for the deal, and we'll have to see. But I don't expect that from our side. And as far as overlap might be, we'll have to determine that as we go down whether we can turn certain branches into specialty branches or redeploy what some of those locations do. But we'll address that as we develop the integration plan in conjunction with H&E over the next couple of months.
That concludes our question and answer session. I will now turn the call back over to Leslie Hunziker for closing remarks.
Hey, thank you for joining us on the call today. We'll look forward to updating you on our progress in the quarters to come. And of course, if you have any further questions, please don't hesitate to reach out to us. Have a great day.
This concludes today's conference call. Thank you for your participation. You may now disconnect.