United Rentals Buys Competitor in Big Sector Bet

NEW YORK (TheStreet) -- United Rentals (URI) is buying RSC Holdings (RRR) for $1.9 billion in a cash and stock deal that will require it to raise over $2.3 billion in acquisition financing.

In the deal, United Rentals will pay $10.80 in cash and 0.2783 of a share for each of RSC's shares, valuing them at $18.04 a share, or a 58% premium to Thursday's close.

RSC's largest shareholder private equity firm Oak Hill Capital Partners has approved the deal, according to a press release. Currently, Oak Hill owns 33.5% of RSC's stock.

Oak Hill and Ripplewood Holdings bought RSC Holdings in 2006 and then IPO'ed the company a year later just ahead of a construction and economic slowdown. Other large RSC Holding shareholders are Lord Abbett, Barrow Hanley and hedge fund York Capital, all with over 4% holdings.

For United Rentals, the largest equipment rental company in the world, buying its closest competitor in RSC Holdings is its largest ever deal. The deal signals a double down on the market to rent large construction equipment such as backhoes, forklifts, scissor lifts, skid-steer loaders, pumps and generators to large construction projects.

Nevertheless, it's still unclear whether a housing and commercial construction revival will bolster end of year profits at either company. Currently, United Rentals is on track to record its first profitable year since the crisis, while RSC Holdings isn't profitable nine months into 2011. Both companies have been hurt by a near one-third slump in post-recession sales.

See three turnaround stocks with breakout potential and six small cap stocks that may rise up to 82% for more on United Rentals and RSC Holdings.

United Rentals said that with RSC Holdings, it will better scale its equipment rental business and catch a rise in industrial and construction activity in 2012 and beyond. The company also expects to wrench out $200 million in annual cost synergies.

"This transaction marks a transformative moment in our company's history," said United Rentals' Chief Executive Michael Kneeland in a statement. "Combining the experience and resources of two top performing equipment rental companies creates an exceptional company," Kneeland added.

After falling to single-digit stock prices during the recession and construction downturn, both companies have seen a rebound in their earnings outlook that's pushed shares near post crisis highs and up nearly 20% year-to-date. On news of the deal, RSC Holdings rose over 53% to $17.45, just below United Rentals' offer price, meanwhile United Rentals rose nearly 2% to $26.54 in early trading.

Prior to the downturn, United Rentals was looking to sell itself for $4 billion, but a deal with Cerberus Capital Management fell through in 2007. Since then, the company has been loss-making in each of the following three years. United Rentals has been profitable nine months into 2011.

After the deal closes, which is expected in the first half of 2012, RSC shareholders will own about 30% of the combined company and three directors on the company's board.

United Rentals will use some of its $26 million in cash on hand, in addition to $2.3 billion in financing from Morgan Stanley (MS), Bank of America (BAC) and Wells Fargo (WFC). United Rentals also expects to buy back up to $200 million in stock on the closing of the merger.

-- Written by Antoine Gara in New York