United Rentals: H&E Acquisition a Good Fit for Expanding URI's Share in Existing Markets

United Rentals announced on Jan. 14 that it is buying smaller competitor H&E Equipment Services for $92 per share in an all-cash transaction set to close in the first quarter. The enterprise value is $4.8 billion, including $1.4 billion of acquired net debt, which is 5.8 times trailing 12 month EBITDA after $130 million of expected annualized cost synergies within two years of close and tax benefits of about $54 million. H&E’s trailing 12 month revenue is $1.5 billion, about 10% of United Rentals' revenue. Management expects the deal to be accretive to EPS and free cash flow in its first year after closing and will fund the deal by issuing new debt and using credit lines. This additional leverage should bring net debt/EBITDA to about 2.3 times, and management expects to be at about 2.0 times within 12 months of close, all within the normal target range of 1.5-2.5 times. United Rentals will pause share repurchases while it incorporates the acquisition and reduces debt but stressed no change to its dividend philosophy. We see the deal as roughly value neutral provided the realization of the cost synergies and $120 million of annual cross-selling revenue within three years of close. The revenue synergies target is bringing H&E customers to United Rentals' specialty rental lineup.