The Rental Equipment Industry: A Frenzy Changes To Calm

Diesel Progress North American Edition, Jan, 2001 by Charles Yengst

Over the past five years or more, we have been fascinated by the attention given to the rental equipment industry and the growth that has made it so important. Rental equipment has become one of the leading end-use markets for construction and industrial equipment and has become one of the hottest subjects of study. The industry has grown tremendously over the last half-decade and presently consists of 15,000 to 18,000 companies of all sizes that rent every type of product imaginable.

Together, the top 10 rental companies are expected to generate approximately $6.2 billion in rental revenues in 2000, while the industry as a whole will generate about three times that amount. No one can actually determine the industry's true size in revenues. The best that can be done is to estimate the level on weighted averages and make an educated guess. However, most believe that rental revenues are in the range of $15 to 20 billion.

The industry has been undergoing consolidation in recent years -- indeed, the frenzy of acquisitions was considered outrageous in 1998 and 1999. But with the coming of 2000, the frenzy changed to a calm for most companies, thanks to higher interest rates, greater competition, the coming of e-commerce and the need for restructuring and corporate sanity.

The industry is being run differently today than yesterday. For the most part, machines are not kept as long in rental fleets; the used equipment market is increasing in size; rental rates are declining; and equipment rental markets are expanding outside of North America. Even the way equipment is rented and sold is changing, with e-commerce taking over, especially through auction sites. The traditional roles of the original equipment manufacturers, dealers and representatives are also changing. More and more distributors are expanding their rental programs, and OEMs are selling a wider variety of products directly to rental equipment companies.

The Top 10

It is evident that the year 2000 has been a turning point for the bigger companies, particularly as interest rates have increased and the dynamics of the industry have changed. As shown in the accompanying table, total 2000 revenues for the top 10 rental companies is in the range of $9.5 billion, with proforma revenues (assuming all acquisitions were in place from the start of the calendar year) at approximately $9.7 billion.

In recent months, two of the top 10 companies -- Sunbelt Rentals and BET USA -- were consolidated within one parent company, the Ashtead Group, located in England. ICM Equipment from Salt Lake City, Utah, moved up to 10th position among rental equipment companies. It was 11th in 1999.

It should be noted that Hertz Corp. does not record total revenues for Hertz Equipment Rental Corp. in the same manner as other companies, therefore, that company's total revenues were estimated as closely as possible to match the other companies. Proforma revenues were derived from estimates as to how much current year acquisitions will add to company revenues, assuming the acquisitions had been made at the first of the year.

A number of the companies in the rental equipment market are suffering from declining margins due to rental rate reductions, slowing rental activities in certain geographic areas and restructuring costs that some have experienced as a result of acquisitions made in the past few years. United Rentals, the largest of the rental equipment companies, is bucking the trends in the industry with particularly strong growth in the third quarter of 2000. Similarly, Atlas Copco (Prime/RSC), the No. 2 company in the industry, has not shown any reductions in operating profit margins through three quarters of 2000. Several other major companies, including Nations-Rent, Hertz and National Equipment Services have reported reduced margins and lower earnings, while revenues have increased for each. Further negative results in upcoming quarters are anticipated for many of the companies, and quarterly comparisons will not be as positive, particularly where acquisitions once made a positive impact and no longer exist.

Acquisition activity for the rental equipment industry has dropped markedly during 2000 from the level of consolidation seen during 1998 and 1999. That's not to say that there were no acquisitions, there were just fewer of them. As mentioned earlier, two top 10 companies were consolidated by Ashtead Group in August and United Rentals, Prime/RSC and Hertz continue to show activity in rental equipment company purchases as the year comes to a close. United, for example, has completed 49 acquisitions since the beginning of the current year, while most of the other companies have completed only a few acquisitions or no acquisitions during the same period. It looks like 2001 will be slower yet, as the number of acquisition candidates shrinks and the economy continues to show slowness in line with a "soft landing" scenario.

The Impact On Rental

Many in the industry, particularly some large companies, have stated that economic cycles will not affect their businesses. But there is very strong evidence, based on what happened in 2000, that the economy does have a definite impact on the rental equipment industry. Companies are finding that inventories must be reduced when they get too large and none of the companies are generally able to react quickly enough to downturns and upturns to be completely ready for the cycles that transpire.