United Rentals (URI) To Acquire Neff Corp For $1.3 Billion

United Rentals, Inc. (NYSE:URI) , the largest equipment rental company in the world, has agreed to acquire Neff Corporation (NYSE:NEFF) or Neff, one of the 10 largest U.S. equipment rental companies.

About the Deal

United Rentals will buy Neff for $25 per share in cash. This represents a total purchase price of approximately $1.3 billion. United Rentals expects the deal, which awaits approval from Hart-Scott-Rodino, to be over in the fourth quarter of 2017. The deal is expected to immediately add to cash earnings per share (EPS) and free cash flow generation.

We would like to remind investors that prior to this latest merger agreement with United Rentals, Neff terminated its previously announced merger agreement with H&E Equipment Services, Inc. Accordingly, United Rentals paid H&E a termination fee of approximately $13.2 million on behalf of Neff.

Benefits for United Rentals

Based in Miami, FL, Neff has presence in 14 states and concentrates in southern geographies, offering earthmoving, material handling, aerial and other equipment rental solutions to its 15,500 construction and industrial customers. Hence, Neff’s vast footmark and complementary fleet mix will add efficiencies of scale in key markets, predominantly in the fast-growing southern geographies.

Again, Neff’s presence in the infrastructure sector fits well with United Rentals’ Project XL vertical growth initiatives. Hence, this integration is likely to lead to significant revenue synergies through the cross-selling of United Rentals’ broader fleet, including its specialty offerings. The combined entity is expected to benefit from United Rentals’ fleet mix, as well as Neff’s best-in-class expertise in managing large earthmoving categories.

From the financial perspective, United Rentals expects to realize major cost synergies in operational efficiencies and corporate overhead. It has a targeted adjusted EBITDA impact of approximately $35 million by the end of year two.

Neff is expected to generate $207 million of adjusted EBITDA at a 49.5% margin on $419 million of total revenue for 2017. As of Jun 30, 2017, Neff had approximately $867 million of fleet based on original equipment cost.

Additionally, the company expects to realize about $220 million in net present value of tax benefits included in the $1.3 billion purchase price. United Rentals also expects return on invested capital to surpass the cost of capital within 18 months of closing.

Overall, United Rentals-Neff family will benefit from industry-leading technology, vast exposure and other relevant resources. Importantly, this latest addition will boost noticeable long-term returns for United Rentals’ investors, and build value for its customers as well as employees.

Price Performance and Zacks Rank

United Rentals’ shares have gained 6% year to date compared with 3.2% growth of its industry.

United Rentals came up with better-than-expected results in the second quarter of 2017. Earnings and revenues also improved from the year-ago level buoyed by solid volume growth, record time utilization along with improved rate trend.

Over the last one month, six analysts have increased their earnings estimates for 2017 and seven analysts for 2018. The Zacks Consensus Estimate for the current year has moved north from $9.61 per share to $9.82 in that period. It’s no surprise then that the stock, which has a Zacks Rank #3 (Hold), has potential to move further upward.

Key Picks

A few better-ranked stocks in the same space are Owens Corning (NYSE:OC) and TopBuild Corp. (NYSE:BLD) , both carrying a Zacks Rank #1 (Strong Buy). You can see the complete list of today’s Zacks #1 Rank stocks here.

Owens Corning’s full-year earnings are expected to increase 17.8%.

TopBuild’s full-year earnings are likely to increase 40.3%.

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