Key points
- Emeco has announced that it has agreed to acquire national truck rental business Rentco based on a minimum equity value of $53m (enterprise value of $82m), representing an EV/EBITDA multiple of 4.7x (implies LTM EBITDA of $17.4m)
- The maximum equity value payable could be up to $76m, subject to the performance of Rentco over the next three years. The terms of the profit sharing were not provided, but they are based on EBITDA growth
- Rentco is one the largest players in the Australian road haulage rental market. Its fleet consists of 1500 trailers, 185 prime movers plus ancillary equipment. In FY14 Rentco generated revenue of $45m and EBITDA of $19m
- The consideration for Rentco consists of a combination of upfront and deferred cash, staged asset acquisitions, profit sharing payments, and shares in Emeco which are subject to a four-year staged escrow period
- The acquisition provides Emeco diversification outside of mining into the more profitable road haulage rental market, but weakens its shorter term liquidity position
Commentary
The consideration for Rentco represents an EV/EBITDA multiple of 4.7x and is made up of the following items. It will be funded from Emeco’s existing liquidity reserves and retained earnings from Rentco over the earn-out period.
- Upfront cash: $12.5m
- Deferred cash: $7.3m
- Staged asset acquisition over three years: $20.7m
- Emeco shares at 12.6c: $11.4m
- Minimum consideration: $51.9m
- Three year out based on average EBITDA ($0-$23m)
Emeco is not using debt to fund the acquisition, and has staggered most of the payment profile. The deferred payments are unsecured obligations which need to be made ahead of the secured bond from a timing perspective. Rentco appears to be performing well as a business, with a FY14 EBITDA margin of 42%, but 1H15 looks a little weaker based on the EV acquisition multiple. This compares to a 14.6% EBITDA margin on Emeco’s 1H15 result, and a 29.9% margin on Emeco’s FY14 result. Having said this, based on an assumption of $7m capex/depreciation per annum, the implied EV/EBIT multiple 7.9x looks toppy for a truck rental business offering no synergies.
The acquisition represents a step out of mining and will diversify Emeco’s overall earnings base. Industry dynamics in the road haulage industry have been positive – national freight volume has grown at a compound average growth rate of 3.4% over the past 10 years. The margins on the Rentco business are healthier than Emeco’s and the road frieght industry has been in a growth phase.
Offsetting this, is the fact that fleet rental businesses are highly competitive and margins can be quickly squeezed if conditions deteriorate, as we’ve seen with Emeco’s fate in the mining sector. Rentco’s business is leveraged to economic growth in Australia, where the prospects for low growth are seemingly more likely. The Rentco business is relatively small in the context of Emeco’s debt burden so it is unlikely the immediate credit metrics will improve enough to justify an improved credit rating.
Emeco has stated that the fleet value contribution is $70-$75m on a written down value basis, offset by $24m of secured hire purchases, which means the transaction adds about net $50m of truck and trailer assets to Emeco’s existing mining fleet. Capex / depreciation is about $7m per annum, the average truck life is four years based on an eight year useful life, and the trailers get continuously rebuilt. However, it is unclear whether Rentco’s assets will fall into the security net of the bonds and this is something we are following up.
Over the longer term, we consider the acquisition to be a moderately net positive move for bondholders given:
- The diversification in revenues outside of mining.
- No debt used to fund the acquisition.
- Additional truck/trailer assets added to the balance sheet, offset by weaker liquidity for the company in the shorter term.
However, the company has provided limited details on the outlook of Rentco, its cashflow generation and the terms of the earn-out so our view could change as further information comes to hand. For example, the earnings contribution from Rentco is relatively small at this stage. If earnings were to grow materially over the next few years then this could become a more positive outcome for the bonds.