SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
SCHEDULE TO
Tender Offer Statement under Section 14(d)(1) or
13(e)(1)
of the Securities Exchange Act of 1934
H&E EQUIPMENT SERVICES, INC.
(Name of Subject Company (Issuer))
UR MERGER SUB VII CORPORATION
a wholly owned subsidiary of
UNITED RENTALS (NORTH AMERICA), INC.
a wholly owned subsidiary of
UNITED RENTALS, INC.
(Names of Filing Persons (Offerors))
Common Stock, par value $0.01 per share
(Title of Class of Securities)
404030108
(CUSIP Number of Class of Securities)
Joli Gross
UR Merger Sub VII Corporation
100 Stamford Place, Suite 700
Stamford, CT 06902
(203)-618-7342
(Name, address and telephone number of person authorized
to receive notices and communications on behalf of the filing person)
With a copy to:
Francis J. Aquila
Sullivan & Cromwell LLP
125 Broad Street
New
York, NY 10004
(212) 558-4000
CALCULATION OF FILING FEE
Transaction Valuation* |
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Amount of Filing Fee* |
N/A |
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N/A |
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Pursuant to General Instruction D to Schedule TO, a filing fee is not required in connection with this filing as it relates solely to preliminary communications made before the commencement of a tender offer. |
¨ Check the box if any part of the fee is offset as provided by Rule 0-11(a)(2) and
identify the filing with which the offsetting fee was previously paid. Identify the previous filing by registration statement number,
or the Form or Schedule and the date of its filing.
Amount Previously Paid: |
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Not applicable |
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Filing Party: |
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Not applicable |
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Form of Registration No. |
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Not applicable |
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Date Filed: |
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Not applicable |
x |
Check the box if the filing relates solely to preliminary communications made before the commencement of a tender offer. |
Check the appropriate boxes below to designate any transactions to
which the statement relates:
x |
third-party tender offer subject to Rule 14d-1. |
¨ |
issuer tender offer subject to Rule 13e-4. |
¨ |
going-private transaction subject to Rule 13e-3. |
¨ |
amendment to Schedule 13D under Rule 13d-2. |
Check the following box if the filing
is a final amendment reporting the results of the tender offer: ¨
This filing relates solely to preliminary communications made before
the commencement of a tender offer for the outstanding shares of Common Stock, par value $0.01 per share, of H&E Equipment Services, Inc.
(“H&E”) by UR Merger Sub VII Corporation (“Merger Sub”), a wholly owned subsidiary of United Rentals (North
America), Inc. (“URNA”), which is a wholly owned subsidiary of United Rentals, Inc. (“URI”).
Additional Information
This communication is for information purposes only and not intended
to be a recommendation to buy, sell or hold securities and does not constitute an offer for the sale of, or the solicitation of an offer
to buy, securities in any jurisdiction, including the United States. Any such offer will only be made by means of a prospectus or offering
memorandum, and in compliance with applicable securities laws. At the time the tender offer is commenced, we will file, or will cause
to be filed, tender offer materials on Schedule TO with the SEC and H&E will file a Solicitation/Recommendation Statement on Schedule
14D-9 with the SEC, in each case with respect to the tender offer. The tender offer materials (including an offer to purchase, a related
letter of transmittal and other offer documents) and the solicitation/recommendation statement, as they may be amended from time to time,
will contain important information that should be read carefully when they become available and considered before any decision is made
with respect to the tender offer. Those materials and all other documents filed by, or caused to be filed by, URI and H&E with the
SEC will be available at no charge on the SEC’s website at www.sec.gov. The tender offer materials and related materials also may
be obtained for free (when available) under the “Financials—SEC Filings” section of our investor website at https://investors.unitedrentals.com/,
and the Solicitation/Recommendation Statement and such other documents also may be obtained for free (when available) from H&E under
the “Financial Information—SEC Filings” section of H&E’s investor website at https://investor.he-equipment.com/.
Item 12. Exhibits
Exhibit 99.1
Acquisition of H and E Equipment Services by United Rentals Call
Operator
Hello, and welcome to the H&E
Acquisition Call. Please be advised that this call is
being recorded. Before we begin,
please note that the tender offer has not yet commenced and none of the comments made on today's call is an offer to purchase or a solicitation
of an offer to sell securities or a recommendation to buy, sell, or hold securities. Once the tender offer is commenced, United Rentals
and H&E will make certain filings with the SEC. The filings will contain important information that should be read and considered
carefully before any decision is made with respect to the tender offer. The filings will be available at no charge on the SEC's website
and on the websites of United Rentals and H&E.
In addition, note that comments
made on today's call and responses to your questions contain forward-looking statements. The transaction being discussed today is subject
to a variety of risks and uncertainties, which should be considered carefully. A summary of these uncertainties is included in the safe
harbor statement contained in the investor presentation and press release related to the transaction.
Please note that United Rentals
has no obligation and makes no commitment to update or publicly release any revisions to forward-looking statements in order to reflect
new information or subsequent events or changes in expectations. You should also note that today's call may include references to non-GAAP
terms such as adjusted EBITDA. Please refer to the back of the investor presentation to see the reconciliation from H&E's adjusted
EBITDA to net income.
Speaking today for United Rentals
is Matt Flannery, President and Chief Executive Officer; and Ted Grace, Chief Financial Officer. Today, for H&E is Brad Barber, Chief
Executive Officer of H&E.
I will now turn the call over
to Mr.Flannery. Mr.Flannery, you may begin.
Matthew J. Flannery
Thank you, operator, and good
morning, everyone. Thank you all for joining us on such short notice as we discuss today's announcement to acquire H&E in more detail.
And I have Ted here with me to review the transaction and to answer any questions you might have, and we have Brad Barber, the CEO of
H&E, on the line with us as well.
So, I'll start with a few high-level
remarks and then Ted will discuss the financials behind the transaction. Brad will say a few words and then we'll move on to Q&A,
which we want to keep solely focused on this transaction. Hopefully by now, you've had a chance to review both the press release and
the investor presentation, which laid out the compelling strategic and financial rationale for the deal. The opportunity to acquire H&E,
a company we've long respected, checks all three boxes we require when evaluating M&A: strategic; financial; and cultural.
Beyond adding important capacity that
will support our long-term growth potential, the deal provides compelling returns for our shareholders. And as you've heard me say many
times, growing the core is a key component of our strategy, and H&E will help us accelerate our growth more quickly than we could
achieve organically. Their footprint, customer base, and fleet are complementary to ours in many ways. The addition of H&E not only
enhances our core competencies in the construction and industrial sectors, but it also expands our capacity in key geographies.
Importantly, H&E's historically
GenRent focus will provide us the opportunity to drive cross-selling of our specialty offering, therefore providing significant revenue
synergies. As you've heard me discuss before, offering a one-stop shop across both GenRent and specialty is attractive to customers and
a key aspect of our value proposition.
Financially, we'll generate significant
free cash flow from the deal in year one, while the transaction should also be accretive to our earnings, revenue, and EBITDA, as we
put our M&A playbook to work and leverage approximately $130 million of cost synergies.
Additionally, we intend to quickly deleverage
the balance sheet towards the midpoint of our current targeted leverage range. And as such, we're pausing our share repurchases
consistent with what we've historically done with other large deals. And finally, and just as importantly, culturally, we both share
the same priorities. H&E is a well-known rental provider that's been around for many years. And over that time, I have no doubt
that many of you have spent time with their team and visited their branches and appreciate the compatibility of these two companies.
And this is a key aspect of long-term value creation, as we strive towards the same goal of supporting customers to drive profitable
growth.
Safety and serving the customer are
key tenets of H&E's DNA, just as they are for United. These seasoned operators will be an asset to our combined customer base,
and we look very forward to welcoming the H&E team to the United Rentals family.
In conclusion, we're very excited
about this deal and the opportunity to add roughly 160 new locations in over 30 states, and most importantly, welcoming 2,900 new employees
to team United. Large M&A is one of our core competencies, and this is another example of where we think we can help a business grow
profitably and create more shareholder value.
Ted, over to you.
William Ted Grace
Thanks, Matt, and good morning,
everyone. As Matt just said, we're really excited about this combination. He just walked through the two most important strategic considerations:
first, augmenting our ability to be the partner of choice for our customers; and secondly, providing important capacity to support our
long-term growth goals. So, I'll focus my comments on the financial highlights.
As you saw in our press release,
we've agreed to pay $92 per share for H&E. This translates to an aggregate purchase price of about $4.8 billion, including $1.4 billion
of net debt. Nominally, this translates to 6.9x LTM adjusted EBITDA of $696 million as of September. Adjusted for the $130 million of
cost synergies and $54 million of present value tax benefits, however, this translates to an adjusted multiple of 5.8x LTM adjusted EBITDA.
Beyond the cost synergies, we
also expect to realize other value streams, including cross-selling revenue benefits, which we currently estimate at $120 million by
year three, and fleet purchasing benefits. While the latter won't really impact EBITDA, our estimated 5% purchasing advantage will benefit
rental CapEx, capital intensity, and free cash flow.
Most importantly, looking at
the deal from a risk-adjusted returns perspective, we think this is a very attractive opportunity to put roughly $5 billion of capital
to work to benefit our shareholders. Looking at cash-on-cash returns, which as you know, is our preferred method for evaluating acquisitions,
our base model points to an IRR of better than 15% and an NPV of about $1.1 billion.
From an IRR perspective, I'll
note this is well above our cost of capital and consistent with the other large GenRent deals we've done, including BlueLine, Neff, and
NES.
As we also highlighted in the
press release, we expect the deal to be accretive to both EPS and free cash flow in year one. On a related note -- our note -- sorry,
our plan is to issue standalone guidance later this month and then update guidance after we close, which is currently expected to be
in late Q1. A few other points I'll make quickly.
On the funding side, while we
have a committed bridge facility that ensures sufficient liquidity to close a deal, our plan is to fund the deal through a pretty straightforward
combination of new debts and ABL capacity.
Looking at the balance sheet,
our proforma leverage ratio will be about 2.3x, which is to say comfortably within our targeted range of 1.5x to 2.5x. That said, our
intent is to focus on deleveraging after we close. Consistent with prior deals, we will be pausing our share repurchase plan and rechanneling
cash with the goal of reducing our leverage to around 2x within 12 months of closing.
Importantly, this will not impact
our dividend or our dividend policy, which we continue to view as a critical part of our capital allocation strategy. Combined, these
steps reflect our continued commitment to a smart and disciplined capital allocation strategy that we believe will continue to unlock
value for our shareholders.
Finally, on the mechanical side
of things, I'll mention that we expect to launch our tender for H&E shares within 10 business days. We are targeting to close
by the end of Q1 2025, and we plan to report our fourth quarter results on January 29th and
host our call on January 30th.
So, with that, let me hand the
call over to Brad, after which we'll go to Q&A. Brad?
Bradley W. Barber
Thank you, Ted. Good morning,
all.
Matt and Ted, I want to
thank you both for offering me the opportunity to join you on this morning's call. On behalf of our outstanding employee base here at
H&E and our investors, this is an exciting time, and we look forward to seeing this win-win opportunity through the finalization
of the acquisition.
So, at this point, I'm going
to turn it back to you guys, and I guess, we'll open up to Q&A, but thank you again so much for having us and welcoming the H&E
team to your organization.
Matthew J. Flannery
Great. Thanks, Brad. Operator,
you can open it up to Q&A.
Questions And Answers Operator
(Question And Answer)
The floor is now open for your
questions. (Operator Instructions) Our first question will come from David Raso with Evercore ISI. Please go ahead.
Q - David Raso
Hi. Thank you for taking my question.
I mean, the deal, I think, pretty clearly has solid merits financially for URI, but I'm curious how you see the mix of H&E's
customers, their end markets, how that maybe changes your, let's call it, medium-term organic growth profile. The spirit of the question,
of course is, we're still seeing relatively solid trends in megaprojects, national account-driven business. But there's more uncertainty
around general construction trends just given the rising interest rates. So, I'm just curious how this combination you think impacts
your organic growth profile over the medium term, and I'd also be curious how maybe it impacts your thoughts on CapEx? Thank you.
A- Matthew J. Flannery
Great. Thanks, David. So,
when we think about H&E, right, we're talking about a quality company here. So, whenever we do an overlapping deal, and
specifically in GenRent, where we have a pretty robust footprint, you're really adding capacity. Well, this is
quality capacity. So, when we're thinking about the three ways in which you get capacity of people, fleet, and facilities, we're
very, very pleased and happy to be able to get this opportunity. That capacity is going to not just only fill the customer base at
H&E serving, but these are very fungible assets that are alike in brand and a very consistent fleet profile with what we
purchased, and it's a little bit on the younger side compared to the rest of the industry. So, we view this as an opportunity to
continue to serve the customers at H&E serving, as well as have capacity to continue to serve our customer base.
And there's not as much
differentiation here as one would think. I mean, sometimes people homogenize the local market. I'm going to let Brad speak to it,
but they're not out there serving a man in a truck or a homeowner on the weekends. They're serving the largest mechanical
contractors, steel erectors that are in our industry. We may have a little bit heavier national account base. Certainly, we should
because of our footprint and the breadth of our offering, but not terribly different in the way we go to
market from that perspective. So, we feel good about this opportunity.
From a CapEx perspective, it really
depends on as we go through the execution of the actual integration. We always model in some revenue attrition. Whether that revenue
attrition hits the 15% that we model, or we do a little bit better or a little bit worse, right, will depend on how our CapEx uses change.
But the reason I say that is when you think about attrition, and this is for customers that generally want to have two choices, right,
to have purchasing methodology. Because these assets are fungible, we'll use that fleet to either spur more growth, right, to our base
business or to replace CapEx we would have spent otherwise. So, that's the way we see the interplay here, David.
Q -
David Raso
Okay. Thank you. And lastly,
can you just give us a little color on how the deal came together, and maybe any thoughts on any potential impediments to the deal closing?
Thoughts on Hart-Scott-Rodino or go-shop here, however you want to describe any potential impediments to the deal closing. I noticed
you said you expected to close by the end of the first quarter.
A - Matthew J. Flannery
Yes. So, certainly, this will
need to get regulatory approvals and all that. We have experience here, and we feel really good about our process, and we'll be filing
that jointly, right? Both companies need to file that later this week. So, that part of the step.
The go-shop is just good governance
from H&E's Board. So, that's just something that we'll have to get through. We think we put a very compelling offer here on the table
and a good win-win situation. So, we'll let that play out, but not something we're overly concerned about.
From how this came about,
we've obviously known of each other, each companies for quite some time. These are two really strong brands
in the space. We got together probably in earnest talking about this back in Q3 of '24, and it's just progressed as we've gone
along, and it's been great to deal with Brad and John and their team in putting this deal together. And I think we've really created
a win-win situation here.
Q - David Raso
I appreciate the time. Thank
you.
A - Matthew J. Flannery
Thank you, David.
Operator
Thank you. Our next question
will come from Rob Wertheimer with Melius Research. Please go ahead.
Q - Rob Wertheimer
Thanks. Good morning,
everybody. Matt, I wonder if you could talk just a bit about your thoughts on the cross-sell of the specialty into the H&E
customer base. Just how -- for one, just on your forecasted revenue synergies, which is
not, I guess, in your multiple calculation, how penetrated that assumption gets? I don't actually know if it takes you one,
two, three, five years just to sort of educate the customer base and get sales and everything crossing over.
So, how far does that assumption
go versus your current mix? And then I assume there's already, and you talked about this in the attrition, there's probably some specialty
business you're selling into H&E customers now. Were you able to calculate how big a deal that is? Is this complete white space?
I mean, maybe just talk through that opportunity. Thank you.
A - Matthew J. Flannery
Yes. So, on the latter part of
that, the way we model it, just for clarity is, that $120 million isn't the total opportunity that we would see if we did a customer
profile and what lookalike customers spend in specialty. And when we get under the hood, we'll refine it even more when we get to look
more at the customer data. Obviously, we don't want to gun jump, we don't want to get ahead of any kind of regulatory approval. So, we're
very cautious and smart there. But we've done this quite a few times. So, this is very similar to what we've done in previous deals.
But the way that this goes about is you could imagine that that's only a portion of the lookalike model opportunity for this customer
set. We don't need a 100% penetration on the opportunity.
I don't know, Ted, we haven't
shared what percentage, but --
A - William Ted Grace
It gets factored down considerably (Multiple
Speakers).
A - Matthew J. Flannery
Yes, less than half,
certainly. So, we won't go any further than that. So, that's the way it's modeled. But then specifically about how we see this
opportunity, and like most GenRent deals, H&E does have some specialty business, I don't want to discount that, but it's
less than 5% of their total fleet offerings that they have. They have a little bit of trench and power and a little bit of pump. So,
this is really, when you think about our broader offering and the depth of our offering and the
scale of our offering, this is a great opportunity, as it has been in other GenRent deals.
Q - Rob Wertheimer
Okay. Thank you.
A - Matthew J. Flannery
Thanks, Rob.
Operator
Thank you. Our next question
will come from Jerry Revich with Goldman Sachs. Please go ahead.
Q - Jerry Revich
Yes. Hi. Good morning, everyone,
and congratulations. I'm wondering if I can ask, the planned integration plan here, given just the high margin and dollar utilization
profile of this business, how different is the integration plan versus the last couple of general rental deals that you folks laid out?
And can you touch on how much your local density would improve for the base URI business just by laying on the complementary pieces of
this business? Thanks.
A - Matthew J. Flannery
Yes. Thanks, Jerry. So, as
we talked about in my prepared remarks, right, this is a very complementary business to ours, and they're in key geography. So, we
think in the end-market that we want to grow more, that we want to have -- be able to feed more customer
demand. And this is very complementary to that, not just from the fleet profile, from what the customers expect, but even,
and this is getting to your integration question, when we start putting the teams together, right, the mechanics from both sides are
going to be very familiar with this fleet. This is really going to help.
We'll just add a little bit of
some of our technology and processes that we've been able to invest in over the years that might help further integrate and drive more
productivity and efficiencies out of the shops. But overall, this integration is really going to be very smooth from a quality go-to-market
perspective. This is a quality shop. This is an organization that sells strong value, strong customer service, and values their employees.
So, we think from an integration perspective, this will be a little bit easier from a people and customer go-to-market integration than
some of the previous.
Q - Jerry Revich
Super. And then separately, Ted,
on the balance sheet, you mentioned obviously pausing the stock buyback program. How does this impact the way you're thinking about additional
M&A, if additional opportunities come up? Would you take the leverage ratio higher? Can you talk about how this impacts potential
for additional M&A, if at all?
A - William Ted Grace
Yes. Thanks for the question,
Jerry. So certainly, our focus in the immediate term is going to be getting that leverage down. So, I would say from the standpoint
of large scale M&A or larger scale M&A, probably reasonable to assume that we'd put anything on pause, get to that integration,
get the balance sheet back closer to that neutral position in the midpoint of the range we talk about. Could there be smaller opportunities
on the specialty side, for example? Conceivably, but here again, we've gone out of our way to demonstrate this discipline on the balance
sheet side, and I think people should be calibrated to expect that here.
A - Matthew J. Flannery
Yes. And this isn't just a leverage
question, right? This is a big deal. This is a big integration, and we want to make sure we're focused on doing a great job with it to
serve our customers and to serve employees from both organizations. So, that'll be a big focus for us operationally.
Q -
Jerry Revich
Thank you.
A - Matthew J. Flannery
Thanks, Jerry.
Operator
Thank you. Our next question
will come from Steven Fisher with UBS. Please go ahead.
Q - Steven M. Fisher
Thanks, and congratulations.
I think, Matt, you mentioned about the deal helping you become or be the partner of choice for your customers, and we've already assumed
that or viewed United Rentals as the key partner of choice for their customers. So, were there things that you found that customers have
been asking that just kind of revealed some holes that you had in your business that you think can now be filled through this transaction?
A - Matthew J. Flannery
Yes, Steve. I wouldn't say holes,
but it'd be dismissive to, frankly, everybody else in the industry, but certainly to a 60-year-old quality company like this, that they
don't have relationships and a strong history with customers that we can now get access to and leverage, right, our one-stop shop offering.
So, we see that as the real value, but also the capacity that I spoke to a few times here and the quality of this capacity just to help
serve more of demand that's in the end markets we feel really good about.
Q - Steven M. Fisher
Okay. Fair enough. And then is
there a certain sort of level of market activity or framing for their industrial production or non-res construction that you've assumed
for the next couple of years that, that really make the synergies and the metric works as you've laid them out?
A - William Ted Grace
So, certainly we've modeled this
a lot of different ways. You've got multiple scenarios. It's one of the ways we really think about risk-adjusted returns on invested
capital. We don't get into the details.I think you know Matt alluded to the fact that we put a stake in the ground about '25. We do feel
it's a growth year. I would say based on everything we've seen since today, if we didn't have comfort with where things were, you probably
wouldn't see us underwrite this transaction.
So, we won't get into front-running
'25 guidance and obviously we don't get into multi-year framing of the outlook, but we continue to be positive. Our customers continue
to be positive. When we look at key indicators, we think those also continue to flash green. So, easier to say that qualitatively than
answer it quantitatively, Steve, but we can dig into any of that.
Q - Steven M. Fisher
Great. Congrats to all.
A- Matthew J. Flannery
Thanks, Steve.
Operator
Thank you. Our next question
will come from Tami Zakaria with JPMorgan. Please go ahead.
Q - Tami Zakaria
Hey, good morning. Thank you
so much. I have one question about the footprint. So, could you comment on the footprint of H&E as it relates to URl's existing branches,
and is there any significant overlap that you may have to close or merge some locations? And how does this change your pre-acquisition
plan of cold starts that you had for the next few years?
Operator
Mr.Flannery, do you have this
muted? And Mr.Flannery and team, are you still with us? Looks like we have lost our speakers. Please stand by while I reconnect. Again
this is your operator, please remain on the line, while we get our speakers back on the call. Thank you. Please stand by. Excuse me,
everyone, we do ask that you please remain on the line. As we gather our speakers, please remain on the line.
A - Matthew J. Flannery
Hello? Operator, can you guys
hear us? This is Matt Flannery.
Operator
Yes, sir, we can hear you loud
and clear.
A- Matthew J. Flannery
All right. Well, we dialed in
a cell phone. Are we back on live here?
Operator
We are back live. We do have
a few more questions in queue. I can proceed if you're ready.
A - Matthew J. Flannery
Yes, absolutely. Sorry about
that everyone. We had an outage here. Hasn't happened to us in my tenure, but Tami, you asked the barn burner of a question there, is
the way we left it off. So, I was in the middle of answering it, when people came in and told us you can't hear us. So, I'll
just pick up from there operator with Tami had asked a question about the footprint.
And you could see that on Slide
6 of our investor deck, where there is certainly we have markets, where we have stores in the same place that H&E does, but that's
going to help us to serve more capacity. In instances where we have more capacity than we think the market needs, we may repurpose some
facilities, to your point, about cold starts like we've done historically to open up a specialty offering in that market.
But we're going to wait till
we get to the integration process and we have the field teams from both organizations deciding what we need to do and what's the best
go-to-market with the capacity that we have. There's not -- we have models up-top side, but that's not something that we decide up in
Stamford. That's something that we do at the ground level, because those are the folks closest to serve that market.
Operator
Thank you. Our next question
will come from Jamie Cook with Truist Securities. Please go ahead.
Q - Jamie Cook
Hi, good morning, and congrats
on both sides. I guess a question, Ted, just trying to understand, obviously H&E is a high-quality asset, but just your thought process,
or Matt, your thought process right now on doing a larger deal in GenRent versus specialty, just given GenRent is the area that's seeing
decelerating growth. Was it just nothing materialized of size in specialty, or is it just H&E made sense now? And I'm just trying
to understand, too, are you trying to call a bottom, I mean, on the GenRent side and that the market is too negative?
And then my second question,
if you could just elaborate on any, I guess, investment required associated with this deal that we should be cognizant of that could
potentially weigh more so on margins in 2025? Thanks.
A- William Ted Grace
Sure. So, on the second part
of your question, certainly not anything that we're concerned about or contemplated or modeled that's a concern. On the first part
of why now, why GenRent, we've talked about 2025 being a growth year for a standalone, and we'll still give that guidance on the
29th with our call on the 30th to discuss it of this month. But we think the growth prospects for the future are still positive, and
we wouldn't be doing this deal otherwise. And we think this added quality capacity that we're
getting is going to help us meet that demand. And this is a multi-year view here, right?
We're not going to talk about
calling the bottom or get into anything like that. Our crystal ball is not any clearer than anybody else's, other than what we hear from
our team and our customers that are on the ground. And we feel that adding this capacity at this time is just a smart move for us. There's
not a lean against specialty or towards GenRent. We are constantly working the pipeline. And this was the best use and opportunity for
capital deployment that we saw that can help meet our growth goals and give a good return to shareholders.
Q - Jamie Cook
Thank you.
A- William Ted Grace
Thank you.
Operator
Thank you. Our next question will come from Ken Newman
with KeyBanc Capital Markets. Please go ahead.
Q - Kenneth Newman
Hey, good morning, guys. Congrats
on the deal.
A- Matthew J. Flannery
Thanks.
Q - Kenneth Newman
Maybe for my first question, I
wanted to follow-up on the specialty cross-sell synergy target. I'm curious, do you think that's more of a back half-weighted
ramp on that three-year time horizon? And the reason I ask that is, because I imagine you and HEES have already locked in bill slots
with all your major OEMs for 2025.
So, just trying to get a sense of what's
the ability to start filling in those branches, those key branches with new specialty equipment in '25, or just maybe more broadly,
your opportunity to maybe renegotiate some of the orders you may have already placed for '25 now that you have a bigger buying presence
over those suppliers?
A- Matthew J. Flannery
Yes, it's a fair point. But I
just want to remind everybody, we feel the supply chain, other than some very minor percentage of niche products, is largely back intact.
So, we don't think the supply is going to be an issue here. I think just making sure that we go through the integration, make sure that
we take care of the business that we acquired, and then moving forward as we continue to earn the trust of the customers and the team
of, hey, this is what else we have to offer. So, it will be more, I want to say back half-weighted, but outside of the first six
months, right, just from that, that reality of how you go to market in general. But outside of that, you could see it pretty evenly earned
as we go through once we get through the initial integration.
A - William Ted Grace
Yes, Ken, what we've said there
historically is it does tend to build momentum, right? I mean, you get through the first phase of integration and managing through that,
and then you help everybody understand how to most effectively cross-sell. And so, you can understand that, that then drives more effectiveness
as you get from year one to year two, and then ultimately the goals we set for year three.
Q - Kenneth
Newman
Right. No, that makes sense.
Just for my follow-up, I know we've talked a little bit about the local market mix earlier in the call, but I know fees also plays
a smaller role in some of these larger megaprojects as well. And I'm curious if you think there's any material overlap on the megaproject
side. And if so, how do you think about the opportunities to leverage from combining those rental contracts in the same site?
A - William Ted Grace
Yes, we're not really thinking
of it that way. We're thinking about it from a go-forward. We're all going to serve the business that we've got written today. So, this
is really from a go-forward perspective, having the same quality, fungible assets of the right brands compatible with our go-to-market
and being able to take care of future businesses more the way we'd look at that.
Q - Kenneth Newman
Makes sense. Thanks.
A - William Ted Grace
Thanks.
Operator
(Operator Instructions) Our next question comes from
Angel Castillo with Morgan Stanley. Please go ahead.
Q - Angel
Castillo
Thanks, and good morning, everyone.
Congratulations on the deal announcement. Just wanted to touch on the EPS accretion. I was wondering if you could give us a little bit
more of a bridge or color in terms of what interest rates are you assuming here in terms of the leverage? And particularly as we think
about year one, this being EPS and accretive, could you just kind of talk about maybe the timing of the synergies? You just mentioned
some on the cross-selling, but maybe on the cost side, how much of that maybe you anticipate in the first year and again, maybe how would
you think about some of the other below the line items?
A - William Ted Grace
Yes, Angel, thanks for the
question. On the one hand, we obviously want to be as helpful as possible, and on the other hand, there's some things that are just
going to be more appropriate to answer at close. So, in terms of walking people through the math, if it's okay, we're going to wait
till then. Obviously, we've got to get to the market to fund this, so we'll be dependent on
where the market is. We've made assumptions. We feel good about that. But obviously, we don't want to get ahead of ourselves in that
regard.
In terms of the cost synergies, I'd
say the same thing. If you're just trying to play with numbers for the time being, I'd say, we've probably said historically, assume
a 50-50 weighting in year one, year two. But as we get to close, certainly we'll do our best to refine all of this for you.
Q - Angel Castillo
Understood. And then maybe just
wanted to go back to some of the CapEx discussion that you mentioned. I understand some of it is kind of based on attrition or some of
the other kind of puts and takes of what happens. But I think there was a comment on the slides about 5% purchasing kind of benefits
here or synergies.
Could you just talk about ultimately, I
guess, is that just lower cost on your CapEx? And then as you think about the younger fleet of H&E, do you anticipate to essentially
age that to closer to where you tend to run your businesses, or is there something about the mix of the assets there that maybe requires
a different approach?
A - William Ted Grace
So, in terms of the purchasing
synergies, it's really just kind of the scale benefit we have, and we've seen this historically. So, on the first part, I think,
that's really kind of where you see it. And again, it's not so much a P&L impact. It's really kind of a fleet acquisition cost perspective.
So, benefits, as I mentioned, kind of CapEx, cash flow, capital intensity.
Sorry, the second part on the purchasing
was what? In terms of fleet age?
Q - Angel Castillo
Yes.
A - William Ted Grace
Yes. I mean, when you blend them in,
it's -- they're obviously coming in at a younger age, call it, sub-41. I think we were nominally about 50 in the third quarter. Apples-to-apples, when you back out our specialty, we'd be in the upper 40s. Yes, but it's not going to drive a huge shift in it and there really
is not the plan to re-age the combined fleets any meaningful way.
A - Matthew J. Flannery
Yes, Angel, we have a Rental Useful
Life, right, program that we use, including the disposal value, and we'll continue to run that over their asset base.
Q - Angel Castillo
Understood. Thank you.
A - Matthew J. Flannery
Thanks.
Operator
Thank you. Our next question
will come from Steven Ramsey with Thompson Research Group. Please go ahead.
Q - Steven
Ramsey
Good morning. Wanted to think
about how H&E's GenRent revenue has had outperformed your core GenRent revenue for the last bit of time. I'm curious what you think
accounts for that divergence and then learnings you can take and apply to the larger enterprise?
A- William Ted Grace
Yes. I don't think we're really
going to comment on kind of their historical numbers too much there, Steve. But certainly, as is the case with every acquisition, when
we go in, we know there's things we're going to learn from the other party, and that certainly will be the case here. But in terms of
comparing and contrasting, I'm not sure could help you too much there.
A- Matthew J. Flannery
Yes. As you can imagine, as they've
been growing their footprint and doing more cold-starts, right, that's been helping spur some of their growth, which is great.
It's more facilities, more capacity that they've built that we get to add to the team. So, we're·· well, once again, can't
say it enough times that we're joining here with a quality company, so we feel good about bringing them on board.
Q - Steven Ramsey
For sure. Okay. And then one last one
to circle back to the specialty cross-sell. It seems like a relatively conservative estimate on that penetration level to what
you •· what United does. I'm curious if there's any constraints to reaching your levels of specialty penetration over the
longer-term, or if the end market breakout, the difference in H&E versus you accounts for some of that?
A- William Ted Grace
Yes, I'm not sure how you
might be looking at this. But what I would tell you is, if you were to think about that three-year target as a function of LTM revenue,
it would be on the order of about 8%. If you were to look at the most analogous deals we've done, which we would say are NES, Neff, and
BlueLine, they probably averaged a little less than 6%. So, it's actually, call it, a third higher on a relative basis. And what that
reflects, as much as anything, is we've added more lines of specialty, right? So, if you went back years ago, we wouldn't have had maps,
obviously. We wouldn't have mobile storage, and we wouldn't have ROS. So, really, it's just kind of adding more lines of business that
we think should improve the relative opportunity there.
Q - Steven Ramsey
Excellent. Thank you.
Operator
Thank you. It appears we have
no further questions in queue at this time. I'm sorry, we do have one question we'll take from the line of Scott Schneeberger with Oppenheimer.
Please go ahead.
Q - Scott Schneeberger
Thanks. Yes, guys.
Just two, I'll ask them both up front. One on the go-shop. That's not•· I don't believe that's common for you all in
the past. Just any comments a bit level deeper than beyond what David asked there about how that came to be and your anticipation?
And then also, kind of following
on the revenue synergies, long-term, it seems like, yes, there's a potential upside to what you put out there today. Near-term though,
could there be·· like with past GenRent acquisitions in the near-term, could there be some dis-synergies on revenue, on
some transactional business? Just any thoughts there. No need for quantification. I know we'll get that in a few weeks, but just on those
two. Thanks, guys.
A - William Ted Grace
Yes, sure. So, on the first one
on the go-shop, it's just something that, that the H&E Board and their leadership team felt was good governance, something they should
do, as this was not an auction, but a bilateral deal and something that was a one-on-one communication. So, we're fine with that. We
feel good we put together a compelling bid. We're not worried about that.
And then on the revenue dis-synergies, I
did state it earlier. Yes, we've modeled in a 15% revenue dis-synergy, as we do with all our deals. And then the execution, once we get
through the integration, we'll see how that works. But we'll repurpose that asset. Let's just use the 15% number.
It's really just a top-line situation.
We'll repurpose those assets and get CapEx savings, or we'll do better than that attrition, and we'll have a little more growth
than we originally modeled in. So, either way, we feel very comfortable. We've had a lot of experience with the reality that there'll
be some dis-synergies in the early going, and then we'll move on from there. So, not anything
we're concerned about, and all figured into our model, which is still with the dis-synergies netting mid-teens internal rate of return.
So, feeling good about that.
Q - Scott Schneeberger
Great. Thanks. Congratulations.
A - William Ted Grace
Thanks.
Operator
Thank you. At this
time, I will turn the call back to Matt Flannery for any additional or closing remarks.
A - Matthew J. Flannery
Great. Thank you, operator, and
thank you all for your patience as we had a little technical difficulty here. This is the first time for everything, but we really appreciate
your time, and I'm glad you could join us today. Our website has an investor presentation with the details from this transaction. And
as always, Elizabeth is available to answer your questions. So, until we speak again on January 30th, stay safe and take care.
Operator, you can now end the
call.
Operator
Thank you. This does conclude
today's call. Thank you for your participation. You may disconnect at any time. Have a wonderful day.
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