Robert W. Baird downgraded its rating on shares of RSC Holdings Inc. (NYSE: RRR) to neutral from outperform following United Rentals Inc.'s (NYSE: URI) intention to buy RSC Holdings for $18 per share.
United Rentals on Friday agreed to buy RSC Holdings in a cash-and-stock transaction valued at $18 per share, or a total enterprise value of $4.2 billion, including $2.3 billion of net debt.
The combined company is expected to enhance growth prospects, a more attractive business mix and greater scale. The companies expect to close the deal in the first half of 2012, subject to the conditions of delivery of tax opinions and a solvency opinion as well as customary closing conditions.
Consideration is split 60 percent/40 percent between cash and stock. Upon the deal closure, each share of RSC will be converted into the right to receive $10.80 in cash and 0.2783 of a share of United Rentals stock, subject to conditions. United Rentals will fund the cash portion through new debt issuance and drawing on current loan facilities.
We recommend that investors take profits today, as prospects of a higher competing bid appear low. We believe significant regulatory roadblocks are unlikely and that the deal should go through sometime within the next six months, said David Manthey, an analyst at Robert W. Baird.
Manthey said the $18.00 price represents a 58 percent premium to Thursday's close and 6.5 times Equity Value/2012 EBITDA, above RSC Holdings' 5 to 6 times historical average and comparable-company valuations in the high-5s during the last upcycle.
Given that this was a negotiated transaction and RSC Holdings was not being shopped for sale, competing industry players such as Hertz (NYSE: HTZ) or the Ashtead Group (London Stock Exchange: AHT) would apparently need to launch a hostile bid to consummate a transaction, said Manthey.
Manthey said prospects of a financial buyer also appear low, as RSC Holdings' largest private equity owner (Oak Hill Partners, 33.5 percent ownership) has agreed to this acquisition and any financial buyer would not enjoy the $200 million in expected synergies.
We believe regulatory roadblocks are unlikely. Although the transaction would combine the two largest North American rental equipment providers, combined market share would still be less than 15 percent. Low expected branch closures between the two companies (estimated to be 5 percent to 10 percent) also supports this view, said Manthey.
RSC Holdings stock closed Friday's regular trading up 57.87 percent at $17.95 on the NYSE, while shares of United Rentals closed up 7.10 percent at $27.89.