Element Financial to split itself in two
Fleet and asset management to be separate publicly traded companies
Element Financial Corp. is splitting itself in two, a move executives say will help it boost the value of its core fleet-management business while meeting investor demands for an expanded family of funds.
When the separation is complete, 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 that was initially focused on how best to realize the value of Element’s growing fleet business, which leases and manages vehicles for customers ranging from Tim Hortons to DuPont.
At the time, Toronto-based Element said it was putting its Canadian commercial and vendor finance business up for sale with 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 we create more investmentgrade 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 with a strong investmentgrade balance sheet.”
In addition, Hudson said the split will resolve the “substantial undervaluation” of the fleet business.
“You look to comps of standalone fleet businesses and they are substantially higher than those currently enjoyed by Element,” he said.
“It’s our strong belief that the cost of capital, the leverage on stand-alone fleet as well as asset management will drive toward higher valuations for the two businesses.”
Kroll Bond Rating Agency said the separation will be credit positive for Element Fleet Management, which will be the world’s largest publicly traded fleet-management business after the split.
“The company’s core fleet management and rail businesses have 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 earn 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 allow the company to increase leverage, said National Bank analyst Shubha Khan.
“As a result, Element will be able to liberate excess capital, and potentially increase operating earnings, and ultimately drive higher valuations,” Khan wrote in a note to clients, adding that he believes as much as $2.2 billion in capital could be freed up.
In January, Element said that growing its fleet-management business is its top priority, 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 said.
Element will provide further details of the separation once it has figured out the most efficient way to do it, the company said. It hopes the split will be completed on a taxfree basis before the end of 2016.