Scale benefits

23 April 2008

The deal for National Hire and private equity firm Carlyle to acquire Coates Hire could never be described as the simplest financial transaction ever conducted. National Hire, Coates, WesTrac, Carlyle, NED Holdings and Allight are just some of the names involved (see box story at end). It's just as well the acquisition prospectus includes a diagram that spells out the relationships between the various parties.

But for all the complexity of the transaction there is no escaping the simple result of the deal: Australia's largest and fourth largest equipment rental companies have combined to create a single business with a 27% share of the total Australian equipment rental market.

Consider that the next two biggest rental companies, Boom Logistics (with a 10% share) and Emeco (8%), are specialists - cranes/access and heavy mining equipment, respectively - and you have in the new National Hire-Coates business the biggest general rental company by a very considerable margin.

"The acquisition is absolutely transforming", says Malcolm Jackman, the former managing director and chief executive officer of Coates Hire who will lead the combined business, "There always was a gap between Coates and the other next biggest player; with the new Coates the gap is even bigger.

"The combined market share is about 27%. In that environment, the opportunity for us is just huge, because we can offer so many things to our customers. We have a full range, from top to bottom: in our excavator line we go from a hand shovel to a 250 t excavator; from a 6 ft step-ladder to a Genie Z-135 boom; from a 5 kVA genset to a 1.5 MV mini power station. The depth and breadth is just enormous."

Mr Jackman, speaking to IRN by phone from his Sydney office, says the size of the business - which will be run under the single Coates brand - is essential in the modern rental industry; "We are all agreed that scale has become very important. If you stay small and focused, that's OK. If you're big you have to be seriously big - you need to get scale benefits."

Mr Jackman says the 27% share still gives some "headroom" to grow before competition authorities start to get seriously interested. In any case, he says, further growth in Australia will not be a key issue; "We are the dominant player - I just want to make sure we remain in the dominant position."

If scale and market share is one consequence of the deal, then just as significant is the new role that Caterpillar will play in the merged rental business. National Hire is majority owned by Caterpillar dealer WesTrac and National Hire ran Cat Rental Stores in New South Wales, Western Australia and the Australian Capital Territory.

The use of the Cat Rental Stores brand can now be used by the combined Coates business in these territories, including a large number of previous Coates locations. "Cat was the enemy of old", says Mr Jackman, "Now we are part of the camp. Relationships will be much closer."

Other Caterpillar dealers in Australia have the rights to the Cat Rental Store name in their own territories, but Mr Jackman says that Coates and all the Cat dealers are discussing how the rental store branding will be handled in future; "How and where we use the Cat Rental Store brand is still being defined", he says, "You will see that the relationship between Coates and the Cat dealers will evolve over the next few years."

If the new link to Coates gives Cat a fantastic sales route to Australia's sizeable rental sector, there are other perhaps more significant implications for Coates.

For example, with WesTrac and Carlyle involvement there is a clear opportunity for Coates to consider some kind of global expansion. "Our parentage would indicate that expansion outside of Australia in the medium term is a very real possibility for us", says Mr Jackman. He defines medium term as less than 5 years.

"The whole rental industry globally is looking at China and India", he says, "As they develop, there are going to be opportunities for us. I think in the next 12 months you will see our plan for future expansion further clarified. Clearly our new owners are very, very focused on growth."

Carlyle still has an ownership stake in Hertz Equipment Rental Co (HERC), and WesTrac is also exclusive Caterpillar dealer in Northern and North East China, where it already carries out some rental (mainly of larger equipment with operators).

The link via Carlyle to Hertz has already led to some interesting contacts between the two companies. "We're just starting to benchmark some activities [with HERC]", said Mr Jackman, "We're comparable in terms of revenues, equipment lines and our territories are very similar. We see us as being able to benchmark together."

Mr Jackman could never be described as being overly cautious, so it is no surprise to hear his longer term aims for the group; "We have an ambition to be the leading rental company globally. We will never be the biggest in the world, but we want to stack our metrics against the top 10. We aim to have the greatest metrics." He says he wants the best return on capital employed; the best customer satisfaction; the most efficient fleet management.

If all of this is exciting and newsworthy, Mr Jackman first has some more prosaic issues to deal with in Australia. Foremost is the integration of the Coates and National Hire rental businesses, a task that will not be painless. Coates had 190 locations and National Hire around 70; "We will reduce that by 20%", says Mr Jackman, "There will be some significant rationalisation. There are regional towns where we both had branches."

He says the aim is to operating as one company by 1 July this summer, with the branch rationalisation and integration of the IT systems completed by the end of September.

The deal has also saddled the business with extensive debt. "From the CEO's point of view, it's a big issue", he says, "But both the businesses are performing sensationally well, and I'm convinced it will perform better. Yes, it has high debt, but we are generating buckets of cash."

In terms of equipment purchasing, Mr Jackman says the aim is to maintain Coates strategy of maintaining close relationships with a small number of key suppliers; Atlas Copco, Dynapac, Bobcat and JLG among them. "Clearly we will have more Cat product", says Mr Jackman. The group will also have an initial five year supplier agreement with Allight, which remains 100% owned by National Hire. Allight manufactures its own lighting towers and sells FG Wilson generators and Godwin pumps in Australia.

So the merger brings enormous challenges and opportunities for Coates, and Mr Jackman, who is attacking them with characteristic energy. He can't resist issuing a good-humoured challenge to rental company CEOs in Europe and elsewhere; "You guys ought to be travelling over here to see how it's done!"

The transaction

The acquisition sees Coates Hire merged with the rental operations of the National Hire Group. The combined rental business, to be run under the Coates brand, will have total revenues of A$991 million (€577 million), and will be operated by NED Holdings, a new business co-owned by National Hire (47% share), Carlyle (47%) and financial investors (6%). In essence, Coates will be owned jointly by National Hire and private equity firm Carlyle.

National Hire, which is 53.7%-owned by Caterpillar dealer WesTrac, remains an independent business whose assets comprise its equity share of NED Holdings and its capital sales business, Allight. Several of the top executives of National Hire, including executive chairman Ray Romano, are also directors of WesTrac.

The combined rental business will include Coates specialist divisions Coates Offshore, based in Aberdeen, UK, which rents compressors and other equipment to the oil and gas industry, and Allied Equipment, which rents and sells large earthmoving equipment to the Australian mining sector.

Coates CEO, Malcolm Jackman, said the Allied business remained a "core" activity that will definitely be retained. He said the Coates Offshore business was "well managed and profitability is really good" and will be subject to a strategic review.

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