TORONTO – Element Financial Corp. is splitting itself in 2, moving executives say will help it boost the worth of its core fleet-management business while meeting investor demands for an expanded family of funds.
When the separation is finished, Element shareholders will own stakes in two separate publicly traded companies – Element Fleet Management, with $19.5 billion in fleet and rail assets, and Element Commercial Asset Management, with $7-billion worth of equipment, rail and aviation financing.
Brad Nullmeyer, current president of Element, will run the fleet business, while CEO Steve Hudson will run the asset management business.
Tuesday’s announcement follows a four-month strategic review which was initially focused on the best way to understand the value of Element’s growing fleet business, which leases and manages vehicles for purchasers which range from Tim Hortons to DuPont.
At time, Toronto-based Element said hello was putting its Canadian commercial and vendor finance business on the market having a plan to use any proceeds to expand the fleet business.
However, Element CEO Steve Hudson said the company’s institutional investors didn’t like that idea.
“Strategic investors, upon the announcement in October, requested that people create more investment-grade yielding funds, not less,” Hudson said on a conference call Tuesday.
“This request, together with unprecedented opportunities to acquire yield assets at or below book value have led us to accelerate the transition of our commercial finance business to an asset manager business having a strong investment-grade balance sheet.”
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In addition, Hudson said the split will resolve the “substantial undervaluation” from the fleet business.
“You look to comps of standalone fleet businesses and they’re substantially greater than those currently enjoyed by Element,” he explained.
“It’s our strong thought that the price of capital, the leverage on standalone fleet in addition to asset management will drive towards higher valuations for the two businesses.”
Kroll Bond Rating Agency said the separation is going to be credit positive for Element Fleet Management, which will be the earth’s largest publicly owned fleet-management business following the split.
“The company’s core fleet management and rail businesses possess a relatively lower risk profile than the combined current company, with stronger credit metrics overall,” said Kroll, which currently rates Element’s debt BBB+.
Earlier Tuesday, Hudson said he hopes the split will generate the fleet business an A rating.
The agency added that the split will “aid in disentangling management’s attention on separate enterprises and may sharpen its focus on the core segments, fleet and rail.”
This should permit the company to increase leverage, said National Bank analyst Shubha Khan.
“As a result, Element can liberate excess capital, and potentially increase operating earnings, and ultimately drive higher valuations,” Khan wrote in a note to clients, adding he believes around $2.2 billion in capital could be freed up.
In January, Element said that growing its fleet-management business is its main concern, and Nullmeyer said the split will allow it to do acquisitions without tapping the equity market.
“Should those opportunities arise, we’ll look at them,” he explained.
Element will give you further details of the separation once it’s determined the best method of doing it, the organization said. It hopes the split will be completed on the tax-free basis prior to the end of 2016.
Element’s shares jumped around 10 % Tuesday before closing at $13.28, up 6.33 per cent.
