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Why Contractors Are Renting More and Buying Less

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Photo by Michael Falco
Fleet Outfitter Led by President and CEO Michael Kneeland (right), United Rentals booked a nearly 38% pre-tax earnings margin last year on sales of $2.61 billion. It now is merging with RSC.
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Contractors are facing tough times. Many have scaled back, cut costs and adapted to doing more with less in order to survive.As a result, equipment rentals are flourishing as a means of lowering overhead expenses by trimming debt, licensing fees, taxes, insurance and maintenance.

"Although it may seem counterintuitive, rental companies should be heartened by all this uncertainty," says Frank Manfredi, president of equipment research firm Manfredi & Associates, Mundelein, Ill. "The uncertainty will drive equipment users to use rentals more and more."

One company that has benefitted from the weak economy is United Rentals Inc., led by President and CEO Michael Kneeland.

Under his direction last year, United topped Wall Street expectations, with $2.61 billion in revenue for a 16.7% increase over 2010. The company experienced a 6.1% rental-rate increase and a 69.1% time utilization rate for a 37.7% earnings margin before interest expense, income taxes, depreciation and amortization.

Emboldened, United announced in December it would acquire rival RSC Holdings Inc. for $1.87 billion in cash and stock, plus $2.3 billion in debt. Set to close by summer, the deal would give RSC shareholders a 30% stake in the combined company and add three new positions to United's 11-member board.

United's market dominance is tough to match; the RSC deal would give the combined companies an even bigger footprint. The RSC purchase would more than double United's industrial market presence, a tactic which plays a key role in its long-term growth strategy. Industrial projects are typically less susceptible to the boom-and-bust realities found in the buildings market; they also last longer. Effectively, RSC would boost United's industrial revenue to 35% from 15% of sales, says Nicholas Coppola, an analyst with Thompson Research Group.

"The industrial sector is the first thing to bounce back in an economic recovery," Kneeland told ENR in an exclusive interview. "Also, industrial customers tend to keep equipment longer. About 90% of our fleet already meets the needs of the industrial sector, including aerial lifts, power generators, light towers and air compressors. RSC is a game-changer."

Mind-boggling Logistics

The logistics of the deal are mind-boggling, but they promise to save both companies millions of dollars each year while growing sales. United plans to untangle the firms' geographic overlaps by streamlining RSC's 4,700 employees in 446 rental locations across 43 states and three Canadian provinces. The consolidation would shutter between 50 and 100 branches, saving an estimated $200 million in annual expenses. United would buy back $200 million of its common stock once the deal closes on April 30. United also says it plans to initiate an across-the-board 5% rental rate increase in 2012 to help pay for the stock purchase.

RSC represents the largest acquisition in United's 15-year history, Kneeland says, and the company is still weighing a potential name change. RSC—the nation's second-largest rental firm, according to industry journal Rental Equipment Register (RER)—has a loyal customer following and slightly higher profitability than United. The mega-deal marks a major turnabout from five years prior, when United planned to sell the company for $4 billion to private "equiteer" Cerberus Capital Management, which backed out over contract terms. An ensuing court battle resulted in United receiving a $100-million termination fee.

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