Photo courtesy of Hertz
Hertz Equipment Rental Corp. is the country's third-largest equipment-rental company, with $1.54 billion in revenue last year.

By spinning off its equipment-rental business, Hertz Global Holdings Inc. hopes to make the construction unit stronger while bolstering its core car-rental service. The Park Ridge, N.J.-based company plans to divest the 355-branch equipment unit into a separate, publicly traded company, valued at $2.5 billion.

"Hertz was starving the equipment-rental business through a lack of investment," explains Nicholas Coppola, a senior equity analyst with Thompson Research Group, Nashville, Tenn. "This provides more focus as a stand-alone entity."

The unit, Hertz Equipment Rental Corp., last year recorded $1.54 billion in revenue, an 11% annual increase amid stronger pricing, rental and sales activity of small to medium-sized construction machines and tools in North America, Europe, China and Saudi Arabia. The 96-year-old, 11,500-outlet parent company plans to use the money from the split to pay down debt, buy back $1 billion in stock and refocus on its core car-rental business.

Hertz is the country's third-largest equipment-rental company, reports industry journal RER, with a 43-month average fleet age last year concentrated in trucks, aerial lifts, earthmoving and material-handling equipment. As part of a strategy to gain geographic and market footholds, the 260-employee, franchisee-based firm has acquired 11 companies since 2010, including Pioneer Equipment, Ponca City, Okla.; Arpielle Equipment, Long Island, N.Y.; WGI Rentals, Williston, N.D.; and DW Pumps, San Leandro, Calif. The company is slated to move into a new $70-million, 250,000-sq-ft headquarters in Estero, Fla., in October 2015.

"This split has been a long time coming. Hertz hasn't been paying proper attention to the equipment side of the business, which has caused some dilution," says Fred Hageman, principal of Rental Acquisitions LLC, Cameron Park, Calif. "Breaking off the business will improve their ratio and provide focus, potentially making them more nimble and responsive. The best-run companies do one thing and do it well."

Hertz hopes to capitalize on a forecasted growth of 37.6% in North America equipment-rental activity over the next three years that could reach $52.3 billion in sales by 2017, reports the American Rental Association, Moline, Ill. Nearly 92% of contractors will rent, as needed, machinery in 2014 due to ownership costs and other reasons, notes Wells Fargo Equipment Finance, Tempe, Ariz.

Hertz equipment-rental activity is distributed among industrial, construction and oil-and-gas projects, with 93% of all revenue coming from the U.S. and Canada. Company productivity has improved by 14.5%, or $60 million, since 2006 through utilization gains, according to Hertz Equipment Rental President Lois I. Boyd. Planned future investment into technology, logistics and telematics will improve customer service and operational efficiency, Boyd adds.

Management and board positions for the new equipment company will be determined as separation plans finalize. The tax-free spin-off, expected to finish in early 2015, comes amid activist shareholder pressure for improved earnings and cash flow.