What Does 2007 Hold?
2006 was the year that private equity groups, familiarly known as PEGs, dominated activity on Wall Street. The PEGs were also major investors in the rental industry, as well. RSC was acquired by Ripplewood Holdings and Oak Hill Capital Management for approximately $3.8 billion and NES was purchased by Diamond Castle Holdings for $850 million. The only major deal of size that did not involve PEGs was the acquisition by Sunbelt of NationsRents. Even in that deal, a PEG, Baupost Group, LLC, was the principal selling shareholder of NationsRents.
2007 will, in my opinion, see substantial belt tightening on the parts of these new PEG owners as they attempt to maximize their cash flows to pay down the enormous debt they incurred in leveraging their purchases. This will mean less capital expenditure for growth. The good news is that the independent rental company owners may have an improved opportunity to negotiate better deals with the manufacturers.
After several very robust years of growth and prosperity for the general rental industry, 2007 is likely to be a decent year but not an outstanding year. Historically, single-family home building has been a leading indicator for the rental industry’s major sources of business – commercial and industrial construction. If the trend holds true in 2007, then the rental industry will see less commercial and industrial activity driving rental revenue.
After the PEGs are given a chance to digest their recent acquisitions, we are likely to see another round of consolidation. The big will get bigger and the independents will have to work harder to compete as the majors are making great strides in driving operational efficiencies.
The best news is that equipment rental companies in general are being better managed – higher utilizations, pricing discipline, and better customer service. The result will be an increase in rental penetration, a trend which I expect will continue for some time.
All in all 2007 will be an interesting year.
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FocalPoint is an independent investment bank, specializing in mergers and acquisitions, private placements (both debt and equity), and financial restructurings. The firm’s primary focus is on middle-market companies with revenues between $10 million and $250 million in a diverse range of industries.