TORONTO – Element Financial Corp. is splitting itself by 50 percent, moving executives say might help it raise the price of its core fleet-management business while meeting investor demands to have an expanded quantity of funds.
When the separation is finished, Element shareholders will own stakes by 50 % separate publicly owned companies – Element Fleet Management, with $19.5 billion in fleet and rail assets, and Element Commercial Asset Management, with $7-billion price 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 that was initially centered on the best way to comprehend the requirement of Element’s growing fleet business, which leases and manages vehicles for patrons which range from Tim Hortons to DuPont.
At time, Toronto-based Element stated it was putting its Canadian commercial and vendor finance business in the marketplace utilizing a plan to use any proceeds to develop the fleet business.
However, Element CEO Steve Hudson said the company’s institutional investors didn’t similar to this idea.
“Strategic investors, upon the announcement in October, requested that folks create more investment-grade yielding funds, not less,” Hudson said across the business call Tuesday.
“This request, together with unprecedented the chance to acquire yield assets at or below book value have led us to accelerate the transition within 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” within the fleet business.
“You look to comps of standalone fleet businesses and they are substantially a lot more than those currently enjoyed by Element,” he explained.
“It’s our strong thought that the cost of capital, the leverage on standalone fleet along with asset management will drive towards higher valuations for that two businesses.”
Kroll Bond Rating Agency said the separation will probably be credit positive for Element Fleet Management, which is the earth’s largest publicly owned fleet-management business following a split.
“The company’s core fleet management and rail businesses possess a relatively lower risk profile when compared with 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 create the fleet business a b – – – rating.
The agency added the split will “aid in disentangling management’s attention on separate enterprises and could sharpen its concentrate on the core segments, fleet and rail.”
This should enable the company to boost leverage, said National Bank analyst Shubha Khan.
“As an impact, Element can liberate excess capital, and potentially increase operating earnings, and finally drive higher valuations,” Khan wrote in the note to clients, adding he believes around $2.2 billion in capital may be freed up.
In January, Element asserted growing its fleet-management clients are its priority, and Nullmeyer said the split allows it to complete acquisitions without tapping the equity market.
“Should those opportunities arise, we’ll discuss them,” he explained.
Element provides you with more information around the separation once it’s determined the simplest way to do something, the company said. It hopes the split is going to 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 percent.
