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The Global Equipment Rental Market, well-poised for continued growth

Harsha Wickremasinghe looks at some of the key trends and drivers in the global equipment rental market and analyses a selection of deals that have occurred across the globe so far in 2017.

The global equipment rental market looks to be in solid shape, underpinned by several factors and long term trends that provide plenty of reasons for operators and investors in the sector to feel buoyant about their future prospects. This is most pronounced in the US, where the median EV/EBITDA multiple of the listed North American equipment rental groups is currently at 11.6x, over 40% higher than 12 months ago. Despite the uncertainty created by Brexit and the recent election, the UK listed groups' median EV/EBITDA multiple of 6.8x is almost 30% up compared to the week immediately after last June's referendum. European mainland-based operators are also feeling more bullish, following a few years of muted growth in markets such as France.

Key trends & drivers

An increasing trend towards rental: Most, if not all, rental markets globally are experiencing a continual rise in rental penetration rates. The UK, North America and the Nordics are more advanced in this respect, whereas penetration is much lower in the DACH region, where there is a strong cultural trend (particularly amongst larger German construction companies) towards owning and operating their own fleets. However, an increasing number are now realising the numerous benefits that come with rental, some of which are outlined below:

  • Equipment tracking
  • Reduced capital outlay
  • Improved utilisation of equipment during projects
  • Enhanced cost controls
  • No disposal costs
  • No maintenance costs
  • No requirement for storage/facilities

Greater demand for shorter-term rentals: This is most apparent in the US market, where outlet density is far less than in the UK and Europe. With outlets sometimes up to several hundred kilometres from sites, companies typically gravitate towards longer-term rentals. Building geographical scale via acquisitions offers operators the opportunity to strengthen their presence at a regional level and to offer shorter-term (and more profitable) rentals across a broader range of equipment categories. Sunbelt's cluster-based strategy in local markets is a good example of the benefits that can be gained , namely enhanced EBITA margins and ROI; and

Diversification: Having a comprehensive equipment portfolio spanning all major categories is a key strategic objective, particularly for larger groups. H&E Equipment's recent acquisition of Neff Corporation is a strong case in point; Neff provides H&E with a substantial increase in its exposure to the earthmoving category (H&E has a strong aerial proposition). Specialist hire categories, such as HVAC, power generation and pump solutions , are also particularly attractive growth areas. These businesses typically benefit from strong customer loyalty, offer more bespoke solutions because of their specialist focus and benefit from longer asset lives compared to more general equipment categories. Specialist hire companies typically have higher margins, therefore justifying a higher multiple, compared to more generalist peers.

Other macro drivers, such as a remit by the UK government to build c.250,000 homes per year through to 2021, alongside a long term national infrastructure and construction pipeline valued at over £500bn will drive further growth in the rental sector.  In the US, while detailed plans of President Trump's proposed $1 trillion of infrastructure projects are yet to be fully clarified, an air of positive sentiment permeates throughout the economy with regards to its future outlook. This was buoyed by an 8.3% increase in new US housing starts in June, following three months of declines. The recovery in US construction began earlier than in Europe, which has benefited M&A activity in the sector this year.

M&A activity ramps up

This positive market sentiment has translated into a flurry of M&A activity in the global equipment rental market in 2017 with 41 deals completed this year, compared to just 15 in the same period in 2016.

The key region for deal activity is North America, where over half of deals so far in 2017 have taken place. US M&A activity continues to be dominated near-exclusively by trade, with Sunbelt Rentals (Ashtead Group) accounting for one-third of all transactions so far this year. Consolidation will remain a key theme over the next few years, with the three largest rental groups , United, Sunbelt and Herc, commanding a 20% market share, with the remainder largely comprised of smaller, regional operators.

Europe has also witnessed a solid increase in M&A activity, accounting for 22% of all deal volumes so far in 2017. Large rental groups have spearheaded activity, with the likes of France's Kiloutou acquiring Italian rental companies Cofiloc and Euronol, providing it with a strong regional presence in the north of the country. After more than six years of ownership and almost 20 acquisitions, Kilotou's financial backer, PAI Partners, is understood to be preparing the group for a sale in 2018, which we expect will attract substantial interest from both trade and financial investors.

European market leader Loxam completed its acquisition of UK-based Lavendon Group earlier this year following a protracted bidding war with Belgian rival TVH. The acquisition further cements Loxam's market-leading position in Europe and also provides the French group with a strong presence across the Middle East, via Lavendon's Rapid Access business, with operations in six Gulf countries.

Dutch-based Boels also continued its strategy of bolt-on acquisitions to supplement its aggressive organic growth, with the purchase of specialist rental providers Supply UK Group (tool hire and survey equipment) and IQ-Pass (temporary access control management).

There is also a healthy level of M&A activity in the UK, with specialist categories being the key focal point, particularly for private equity. Primary Capital backed the MBO of plant hire provider to the regulated rail sector, Readypower Engineering, earlier this year. The tightly regulated nature of the sector and the comprehensive maintenance and forecast improvements to the UK's railway infrastructure over the next few years offers scope for considerable growth. Meanwhile Endless acquired sweeper specialist Go Plant, via its specialist vehicle hire contract business, Essential Fleet Services, for an undisclosed sum.

Strong grounds for continued optimism in the global equipment rental market

The combination of continued growth in rental penetration, a greater desire to outsource equipment by construction companies and the opportunity to benefit from the fully-integrated solutions offered by rental companies, offers a strong set of drivers to support the sector's future growth.These, together with the scope for considerable further consolidation, means the global equipment rental market has every right to feel bullish about its future prospects.

Harsha Wickremasinghe

Head of Business Intelligence

Phone: +44 20 7484 4748

Mobile: +44 7919 368409